Who Benefits from Captive Insurance: The Insurer or the Insured?

Two Sides of the Same Coin

The insurer is the insurance company. Insurance companies are designed to be profitable. In order to sustain profitability, insurers increase premiums, often with or without increased claims.

The insured is you, the business owner. The insured benefits from the protection or insurance provided.

Insurance is big business. Companies have significant exposures to protect. Some exposures are required by law, such as workers' compensation, medical benefits, general liability, or errors and emissions. Other exposures are not required yet are available, such as directors' and officers' coverage, cyber liability, and countless other risks.

The Power of Being Both

When a business formally has coverage, pays premium, and binds coverage, the company pays the insurer for that coverage. When a business informally self-insures these exposures, they are responsible for 100% of any future losses from their operating account.

When the insurer and the insured are the same, both parties benefit. Premiums are no longer a sunk cost. In fact, premiums now become profit. When the insured pays premiums to the insurer they own, the profitability of the insurer is the profitability of the insured. Coverage is still bound and provided, claims are still made, and unclaimed premiums become surplus.

Captive Insurance Is Everywhere

Without publicity or fanfare, captive insurance companies are all around in the marketplace, protecting profitable businesses and often offering coverage to consumers. If you have a car warranty, coverage is most likely provided and insured through a captive insurance company. Stop-loss coverage of medical benefits may be covered through captives. All-State originally was a captive insurance company of Sears & Roebuck, until they became large enough to offer coverage to the public.

Why Own Your Own?

Ask yourself: who profits from this captive? Who is the captive serving? Why have coverage without ownership? Why share ownership if you can solely own? Why pay a third party?

There are four legitimate reasons to use a third-party insurer:

• Because it is required.
• Because you prefer to transfer risk to a third-party carrier.
• Because you cannot afford or qualify for ownership of your own captive.
• Because you were never presented with an ownership model.

Different Insurers, Different Purposes

Different types of insurers serve different purposes. All insurers cover risk. All insurers must transfer and distribute risk. All insurers are in business to be profitable. Different types of captive insurance companies serve different purposes as well. All captives insure risk, and all captives must transfer and distribute risk. Your captive will follow all the rules and regulations of properly formed and maintained captive insurance companies.

Business owners understand and feel the weight of risk and how potential losses may affect their business. Insuring against these risks must be considered, whether formally or informally.

Call 720-213-0583 to become the insurer and the insured.