A “self-insured” organization already decided they are comfortable assuming risk. “Self-insured” technically means that a business retains responsibility for the payment of losses. Most companies use the term synonymously with utilizing a large deductible program. Whether a company is truly self-insured or using a high deductible plan, there are several consideration that may make captive insurance a strategic next step as part of your company’s risk management program.
- Predictable Costs – If your company currently self-insures for Workers’ Compensation, General Liability or Auto Liability, you likely have a stop loss policy. This covers extraordinary losses that you do not want to fund on your own. Typical stop loss deductible ares $250,000 to $500,000. This is an effective method of limiting the dollar amount of any one loss incurred. It does not, however, limit your company’s exposure to suffering total aggregate loss or multiple aggregate losses, making your total cost of risk more predictable.
- Taxes – A best practice for self-insured companies, as required by most states for certain lines of insurance, is to maintain adequate reserves to fund losses when they occur. These reserves are likely calculated using a reasonably high loss expectation and set aside with after-tax earnings. Premiums for group captive insurance companies are fully tax-deductible!
- Investment Income – Premiums in group captive insurance are invested and collect interest, typically on a tax-deferred basis. Captive investment returns typically average a respectable 5-6%. Investments are chosen with capital preservation and liquidity as the primary goals. All premiums and investment income not used to pay captive operating costs or claims are returned to you!
- Finite Liabilities – Group captives will usually close out past policy years five years after the policy year has ended. This allows members to know exactly when their liabilities will end and profits and collateral will be returned.
There are many good reasons to consider a captive insurance company for your risk retention and transfer needs. We can help you explore using a captive to limit your risk and better manage the cost of risk in your organization!