Insurance captives have a role in the insurance market, such as but not limited to cost advantages, an opportunity to broaden coverage, and long-term wealth building. That said, this is a complex topic that usually attracts a prospective member (policyholder) with the potential cost savings to as compared to their current insurance program. Often, however, the policyholder may not have fully contemplated the disadvantages to joining a captive.
It should be noted that in general terms, captives operate similarly to insurance companies or self-insurance. Captives are subject to regulatory requirements, capitalization, administrative, and other overhead costs, such as but not limited to vendors and third-party administrators. Therefore, due to the potential high operation costs, many captives are not exclusive to a single company, whereby spreading the captive’s financial needs among multiple captive members.
While captives have their strengths, prospective members should complete their due diligence to ensure it’s the right fit for them. Some things to consider…
Assess what are the additional capital requirements beyond the premium. Since a member may be treated as an owner, they may be required to invest their resources – largely due to loss reserves to pay current and future claims. Further, additional capital may be required for reinsurance and/or to pay for any catastrophic loss within the working layer.
What is the quality of the services provided? Often, captives rely on third parties, vendors and service providers to manage Claims, Loss Control, and other needs. However, in the effort to keep the expenses down, the quality of the service may be compromised.
- Along the same lines as the above, captives must hire a management firm to oversee the operation. This can be a significant expense impact.
- Check with your CPA and/or your tax attorney on what tax benefits you may be eligible for. Over the years some tax advantages have been going away.
- The concept of insurance is based on the law of large numbers, which allows an insurance carrier to maximize the benefits to their policyholders. Captives do not have such luxuries, which can significantly affect the operating cost and actuarial evaluations year over year. In contrast, the carrier’s large volume offers it the ability to smooth out the peaks and valleys that captives may not be able to.
- Depending on the captive arrangement and size, there may be challenges exiting the arrangement, such as separation expenses, ongoing contractual liabilities, on-going costs after departure, finding an alternative market willing to offer coverage, etc.
Whether you’re in a captive or contemplating joining one, USBenefits invites you to have your current program compared to our stop loss products and strategies. USBenefits is known for our exceptional service to help keep your costs as low as possible.