Captive Insurance for Private Equity: An Underutilized Advantage
Private equity firms paying $10-20 million in annual premiums to third parties are underutilizing captive insurance. Here are the top reasons why and how to fix it.
The Private Equity Landscape
The private equity world is a multi-trillion dollar industry. The essence of private equity is mergers and acquisitions. For a typical, established PE company, their portfolio companies are paying $10 to $20 million dollars in insurance premiums to third parties annually.
Private equity firms are underutilizing captive insurance. Why?
Top 5 Excuses Why Captive Insurance Is Not Used
- Ignorance. PE firms don't know what they don't know. Traditionally, PE firms have left insurance decisions to their individual companies, or they were introduced to a captive model that didn't fit their needs.
- Implementation is hard. Not really. People outside the private equity marketplace often say "Private equity is hard." Experts in any field make their field simple and efficient.
- Change is hard. Yes it is. Utilizing captive insurance is different than utilizing commercial P&C outlets. New knowledge, trust, and relationships must be developed. The captive insurance industry itself is not new — it is a multi-billion dollar industry. Many companies have and are making the change.
- I can spend my money to grow or acquire new companies. You are already spending these insurance dollars. Redirecting premiums to your own company where possible creates a new multi-million dollar profit center. You can and should eventually use insurance company assets to do the very things you are built to do — grow and acquire companies.
- It's risky. Insurance is the antithesis of risk. You are already paying millions of dollars to insure, protect, cover, or indemnify your businesses. As an owner of companies, protect your investments as efficiently as possible.
Top 5 Captive Insurance Benefits for Private Equity
- Insurance. These firms have significant exposures to insure — medical, workers' comp, general liability, reps & warranties, cyber, errors & omission, and excess lines. These firms are already paying $10 to $20 million dollars annually to third parties.
- Efficiency. With a captive insurance company, premiums are no longer a sunk cost. Premiums become profits. The PE firm can now utilize economies of scale. The cost of insurance is reduced significantly.
- Purchasing power. Through centralization the cost of insurance drops, and therefore your money can buy more. Centralization of HR, access to the reinsurance market, and transparency of data are all benefits.
- Control. Gain control over your risk management program, centralizing where you can, which lowers costs and allows you to manage your risk how, when, and where you want.
- Flexibility. You can choose what lines should be centralized and what lines your companies should insure through your captive and through the traditional market.
Any and every operating company who qualifies should own their own captive insurance company, not just private equity companies. Many do.