Captive insurance programs enable businesses to reduce their
insurance overspend, fully control their coverage, and turn safety initiatives
into profitable returns.
Unfortunately, though, many organizations shy away from
forming or joining captives because, when they start doing online research,
they often run into incorrect and damaging myths about captives.
Moving forward, we’ll:
Identify the top five myths about captive
insurance programs that are prevalent on the web
Debunk each myth using evidence
Describe the true value and possibilities of a
captive insurance program.
Myth #1: You have to be a huge corporation to benefit from a captive
Why is this myth so prevalent?
When you first start researching captive insurance programs,
most of the messaging on the first page of search engine results focuses on how
captive programs are used by large corporations who hold multiple businesses
and operate facilitates across the globe.
Why is this a myth?
It’s true that single-member captives (in which one business
creates its own insurance company) are generally formed by large corporations,
but that’s not the full story! Group insurance captives or “pool” captives
specifically exist to bring together medium-sized businesses so they can gain
the insurance negotiating power of their bigger competition.
When it comes to whether or not your business is a good
candidate to join a group captive, your business’ size, headcount, or profits
don’t enter into the equation at all. It’s all about the scale of your business
insurance premiums.
The Bottom Line
If you pay more than $150,000 annually in premiums, you are
a strong captive pool candidate. You don’t need to be a multi-national
corporation or a Fortune 500 giant – just a business with a goal of doing
things better.
Myth #2: Entering a group or pool captive exposes your business’ health to
other people’s risks
Why is this myth so prevalent?
The idea that group insurance captives expose your money to
other business’ risks is a logical fallacy. That is, it seems right on its
surface when you have a cursory knowledge of the topic, but a deep dive proves
it to be completely false.
When businesses hear the words “group” and “insurance”
together, they incorrectly assume risk and responsibility are shared equally
among the pool members for claims. They connect the dots and assume that if one
pool member has a “bad year,” it damages their business allies as well.
Why is this a myth?
Pool captives are specifically structured to protect the
vast majority of each member’s investment from the risks and claims of others.
Over 90% of your premiums are specifically set aside for your use.
That means less than 10% of your total investment can be
lost due to claims made by other members of your pool.
In fact, in Launchways’ group captive program, each member retains complete ownership of 98% of their funds. This means that with the Launchways group captive, only 2% of your investment is considered “at-risk.”
The Bottom Line
Yes, group captive membership requires the willingness to
take on increased risk compared to the traditional insurance marketplace, but
it’s absolutely false to say that your potential for profits is at the mercy of
your pool partners.
Myth #3: When you’re in a captive, one big claim can blow up your business
Why is this myth so prevalent?
Like Myth #2, the “catastrophic claims scenario” is a
logical fallacy: it sounds right, but it isn’t! When people hear “self-insurance,” they assume
that means “we’re on the hook for every dollar and cent of every potential
claim.”
Unfortunately, this myth is also sometimes perpetuated by
insurance providers and brokers who are hesitant to work outside the traditional
marketplace. Their motivation is to protect their own interests and ease of
doing work, not yours!
Why is this a myth?
One word: reinsurance. Whether you operate your own
single-member captive or participate in a group or pool program, part of your
investment is always in reinsurance to prevent exactly this scenario.
That reinsurance policy prevents unforeseen or
much-larger-than-expected claims and issues from damaging your business’
long-term viability or standing as a strong group captive partner.
The Bottom Line
Reinsurance is a part of every captive program, and it’s
there to protect you from potentially harming the health of your business.
Myth #4: We’d have to change the way we do business to form or join a
captive
Why is this myth so prevalent?
The idea of creating your own insurance company sounds
pretty daunting at first. Many people assume they’ll need to restructure their
organization to make the captive viable or transform themselves into a more
attractive group pool member.
Like so many other myths we’ve tackled, this one is at least
in part in heavy circulation because many insurance package providers aren’t
crazy about the idea of businesses cutting them out as middlemen.
Why is this a myth?
The whole point of a captive insurance program is that it
allows your business to be itself more fully – you gain the ability to insure
outside-the-box risks, gain ownership over the claims management process, and
reclaim power and autonomy that traditional business insurance limits.
Captive insurance programs aren’t about changing your
business, they’re about changing the circumstances under which you do business.
Furthermore, in the case of group captive programs, independent managers handle
pool responsibilities, meaning there’s minimal change to your day-to-day
operations and responsibilities.
The Bottom Line
A captive is about supporting your business better and
providing greater economy of scale. The idea that you need to significantly
“whip yourself into shape” to be a captive candidate is false.
Myth #5: Captive programs used to offer great perks, but the value isn’t
there anymore
Why is this myth so prevalent?
Anytime people perceive the value of a product or service
has been reduced even a small fraction, there’s often an impulse to throw out
the baby with the bath water.
Single-member captive programs used to offer large
corporations significant benefit as tax shelters, and it is true that most of
those incentives have been removed. In reactionary style, many of the big business
blogs have published content claiming captives “aren’t what they used to be.”
Why is this a myth?
As we’ve established repeatedly in our myth-busting
exercise, insurance captives aren’t just for the biggest companies in terms of
workforce or economic power. Just because those industry leaders are upset about
changing regulations, doesn’t mean you should be tricked into thinking like
them.
In fact, some of those same regulatory changes that have
made captives slightly less profitable for large, multinational entities have
actually made it easier for medium-sized businesses to form effective
pool captives. Even if captives have slightly declined in value for the biggest
business, they’re still loaded with potential for mid-sized businesses.
The Bottom Line
Captive insurance programs still offer tremendous value:
independence, authentic ownership of your business’ insurance and claims
process, and the potential to make a dividend instead of turning overspend into
loss are just three examples of why they’re still relevant and extremely
useful. Don’t be scared off just because they’re not the big-money tax shelter
they used to be.
Key Takeaways:
As we’ve seen, captive business insurance programs (both
single-member and group or pool) allow organizations to navigate the insurance
market in a more personalized, powerful manner.
Even though most entities aren’t big enough to pull off a
single-member captive, medium-sized businesses are increasingly forming
alliances that provide big value and the potential for profit.
There are plenty of myths out there about captives, most of
them designed to make the programs seem scary and risky, but it’s important to
remember:
You don’t need to be a gigantic corporation to qualify for a group or pool captive – you just need to pay at least $150,000 in annual premiums
Within a group insurance captive, over 90% of your investment is protected and sequestered for your use only
Reinsurance is built into captive programs to prevent catastrophic claims events
Captives should be about enabling you to do better, not forcing you to jump through hoops
Even if they’re not spectacular tax shelters anymore, there’s still immense value in the independence and negotiating power captives create
Captive insurance programs have been popular among business’
largest corporations since they were first created in the 1950s. As we enter
2020, however, captives are enjoying a resurgence as a growing solution for
businesses of all sizes trying to think outside the box.
Captives allow businesses to maintain direct control of
their insurance programs, creating a fully personalized experience with its own
unique challenges and opportunities for reward.
Even though captive insurance programs can help businesses
navigate the challenges of employee benefits management, reduce costs, and
build a more useful experience for employees, there’s a major lack of
understanding about what they are and how they work.
Moving forward, we will:
Define captive insurance for beginners
Explain the difference between a captive and
traditional commercial insurance
Review the main pros and cons of captive
insurance
Provide guidelines to help determine if a
captive insurance program might be right for your business
What is Captive Insurance?
A “captive” insurance company is an organization that exists
only to meet the specific insurance needs of its member/owners. That means the
business or businesses insured by the captive are its sole and total owners.
Captive insurance can help a business fulfill all its
insurance needs, from employee benefits and general business insurance to worker’s
compensation, product liability, auto insurance, and so on. That’s why captives
have historically been popular with Fortune 500 companies and major
corporations: they provide complete independence and allow businesses to
circumvent many of the inefficiencies of the commercial insurance market.
When you have an insurance company whose only focus is the
support of your business, you can achieve some pretty impressive stuff.
You can get your employees the benefits plans
they need while controlling expense for them and the business
You can scale your coverage to your exact needs
to minimize overspend
You can eliminate the offerings you don’t need
while finding the best version of what you do need
In order to gain that independence, however, you must assume
the possibility of greater financial risk. When you make the switch to captive
insurance, you’re gambling with your own money, and no longer have your insurance
provider to fall back on because you are now the provider.
Different Types of Captive Insurance
It’s important to know that there’s more than one kind of
captive. Let’s take just a minute to define the main types of captive insurance
programs out there.
Single-Parent or Pure Captive: A captive
that is owned by and works exclusively for its parent company and its
subsidiaries (as for a corporation)
Group or Association Captive: A captive
insurance program created by multiple small or medium-sized companies pooling
their resources and risk to access the advantages of a captive
Rental Captive: An existing, independent
captive operated by a business entity that other organizations can opt into
temporarily
Protected Cell Captive: A captive in
which each organization’s assets and liabilities are kept separate, allowing
access into the captive but minimizing the biggest possible financial gains and
losses
Agency Captive: A captive managed by a
specific agent, who is empowered to reinsure the company by contracting with
traditional carriers based on their assessments
How is Captive Insurance Different from Commercial Insurance?
Now that we’ve defined “captive,” let’s explore how captive
insurance is different from many of the other models you might be familiar
with.
What’s the Difference Between Captive Insurance and Being Fully Insured?
In short, a captive is the complete opposite of being fully
insured.
When you’re fully insured, you pay a set monthly fee to your
insurance company and they assume all financial risk. Being fully insured is most
useful if you don’t have the capital available to cover anticipatable risks.
A captive is only possible if your business has more than
enough capital available to cover anticipatable risks or if you partner with
other organizations to pool resources.
What’s the Difference Between Captive Insurance and Being Self Insured?
Captive insurance is a form of self-insurance, but the two
terms are not interchangeable.
A self-insured business maintains a specific savings account
for unforeseen insurance costs and uses that “rainy day fund” to cover losses
or fill gaps in coverage. However, that coverage is still purchased through the
traditional insurance marketplace.
A captive is far more complex than basic self-insurance because
it involves an organization creating its own insurance entity, not simply socking
away money to pay for insurance-related costs.
What’s the Difference Between Captive Insurance and Mutual Insurance?
In a mutual insurance company, the provider is owned by its
policyholders, acts on their collective best interests, and distributes any
profit through either lower rates or payouts.
That sounds pretty similar to captive at first, but there’s
one key difference: a mutual company, although owned by its policyholders
financially, acts as an independent entity. Policyholders buy in and then trust
the provider to do good by them.
In a captive, the insurance company is part and parcel of
the greater organization which it serves and is steered according to identified
business needs.
Advantages of Captive Insurance
We’ve laid out a lot of information about what captive
insurance programs are, how they work, and how they can transform an
organization’s approach and identity. Let’s pause to reflect on the positive
potential of captives.
A captive insurance program can help you:
Reduce
insurance costs – When you own the insurance company, there’s no mark-up
for services and no need to purchase any coverage you don’t want or need.
Captives offer businesses the best and most granular control over their costs
compared to any other insurance model.
Reward
yourself for good planning – Captives provide the most benefit to
businesses with great self-knowledge. If you understand your assets, risks,
needs, and scale well, you can create a captive that protects you with minimal
overspend in a bad year and generates difference-making profit in a good year.
Create
ideal employee benefit packages – Each workforce has its own specific,
identifiable healthcare and employee benefit needs. Unfortunately, even with a
great broker, it’s tough to create bespoke coverage that meets everybody’s
needs and saves everybody money. A captive allows businesses to get creative
and find new ways to get their employees exactly what they need without having
to spend a dime on things they don’t.
Insure
outside-the-box risks – Sometimes an organization needs to take a big risk
and gamble on itself to take the next step. Finding insurance to protect
investors and keep the core of the business whole should one of those major
strategic gambles fail is more difficult than ever on the open market. If you
have a captive insurance program, however, you can create whatever coverage you
need and avoid needing to “sell” a carrier on your business plan.
Specific
tax benefits – There’s a misconception that all the tax benefits of captive
programs have been eliminated over the last few years, but that’s actually not
true. First of all, all premiums an organization pays to its own captives are
tax deductible. Furthermore, in down years, he captive’s status as an insurance
company can earn its parent organization loss reserve deductions.
Disadvantages of Captive Insurance
Of course, as we’ve seen, the captive program approach isn’t
right for every business. Let’s pause briefly and reinforce the main reasons
and organization would not want to create a captive.
Unfortunately, with a captive insurance program, you:
Assume increased risk – When you form a
captive program, you are your own support system. There’s nobody else paying
into the pool of funds that’s used to bail you out in a pure captive, and even
in a group captive, if multiple partners have bad years, it can lead to major
financial complications. If your business is risk-averse by nature, a captive
might not be right for you.
Take
on up-front expense – Establishing a captive is a time-consuming process
that requires creating an insurance company from scratch.That means, as
you’re planning and building your program, you’ll need to take on more hires,
acquire new licenses, and bring in some consultants who are captive experts. At
the same time, you need to allocate capital to underwrite your plans.
Create new management responsibilities – People
sometimes misunderstand that a captive can be managed by a human resources
department’s employee benefit expert. That’s actually not true, as the captive
is a full-time, constantly operational insurance company. That means either
bringing in new managers to operate the division or creating new
responsibilities for other members of your core team.
Risk taking a step back –It’s possible
that, in its initial years, your captive might not do as good of a job as a
traditional provider. If you’re not comfortable taking one step back to take
two steps forward, a captive probably doesn’t fit your leadership style.
Don’t
get the tax benefits you would have in the past – While captives still
deliver some tax perks, they’re definitely not the shelter and deduction
powerhouses they used to be. With that said, if your main motivation for
creating a captive is tax protection, you’re likely not a good candidate for a
captive program in the first place.
How to Know if Captive Insurance is Right for You
In general, captive insurance is best for businesses that
are:
Large and stable (or medium-sized and stable,
backed by a group of similarly stable partners)
Comfortable taking risks with the potential for
high reward
Thinking and operating in an open-ended,
creative way
Recruiting a diverse workforce with varied
medical needs and preferences
Dissatisfied with traditional corporate and
business insurance
Confident in their ability to improve over time
On the other hand, businesses should keep away from captives
if they are:
Small or in an early developmental stage
Risk averse or unable to raise significant
capital
Relying exclusively on outside companies and
contractors to identify and manage their insurance needs
Completely satisfied with the pricing and
coverage they get through traditional insurers
Unwilling to take one step back in the short
term in order to take many steps forward in the long term
Key Takeaways
Captive insurance programs are unique, complex, and create
brand new challenges for the businesses who decide to leverage them.
At the same time, however, captives remain underappreciated
as ways to meet all of your business’ total insurance needs while controlling
costs and connecting with your ideal coverage.
There’s no “right answer” when it comes to whether captive
insurance programs are effective or not; the approach’s potential for success
is directly tied to an organization’s desire to think and work beyond the
limitations of the traditional marketplace and commitment to getting things
right.
If you’re wondering if a captive program could benefit your
organization, remember:
Captive insurance companies support only the
organizations that own them
A “pure” captive involves just one company or
corporation
A “group” or “association” captive involves a
group of businesses banding together to share risk and support one another
Starting a captive insurance program is
basically the opposite of being fully insured – you assume all risk
Captives can help organizations build bespoke
insurance plans, both for business needs and employee benefits
Captives aren’t for small or risk-averse
businesses
It’s not uncommon to hear about large cyber attacks on high-profile companies like Target or Sears. For many organizations, hearing about these attacks has raised awareness about the potential threat of a cyber attack.
However, recent surveys by the Small Business Authority and the National Cybersecurity Alliance suggest that many small business owners operate under the false assumption they are safe from the threat of a cyber attack.
A common misconception is that hackers only target large organizations. The truth is, businesses of any size can be targeted. And when it comes down to it, small business are less likely to have the correct processes in place to protect themselves from a cyber threat.
Studies by the Small Business Authority indicate that many small businesses are grossly underprepared to prevent and/or diffuse a cyber threat. For example:
Less than 50% of small businesses have cyber security measures in place
Of the 50% of businesses with cyber security measures, a majority of the protections are rudimentary at best
Only 25% of small business owners have had an outside source test their computer systems to ensure they’re hacker-proof
40% of small businesses do not have their data backed up in more than one location
Small Doesn’t Equal Safe
More often than not, small business owners believe they are not at risk for cyber threats. In fact, despite wide-spread cyber attacks in recent years, 85% of small business owners believe their business is safe from hackers, viruses, malware, or a data breach.
Although many business owners mistakenly believe hackers would prefer to target large organizations, this is entirely untrue. A cyber attack can affect any organization of any size at any time if the appropriate protective measures are not taken. In fact, a study by Symantec found that 40% of cyber attacks are against organizations with fewer than 500 employees.
The Effect of a Cyber Attack on Your Bottomline
The fact of the matter is that a cyber attack can have devastating consequences for your organization. According to Kaspersky Lab, the average cost of a cyber attack to a small-to-medium-sized business is +$200,000. This same study found that 60% of businesses that experienced a cyber attack closed permanently within six months of the attack.
The unfortunate truth is that a majority of these attacks could have been prevented with the appropriate precautions in place.
10 Steps You Can Take Today to Prevent Cyber Attacks
Even if you don’t have the resources to overhaul your cybersecurity measures, there are many steps you can take to increase your security. Here are ten steps you can take today to lower your risk of a cyber attack:
Train employees in basic cybersecurity principles.
Install and regularly update antivirus and antispyware software on every computer used at your business.
Use a firewall for your internet connection.
Download and install software updates for your operating systems as soon as they become available.
Make backup copies of important business data and information.
Control physical access to your computers and network components.
Secure your Wi-Fi networks. If your workplace has a Wi-Fi network, make sure it is secure and hidden.
Require individual user accounts for each employee.
Limit employee access to data and information and limit authority to install software.
Regularly change your passwords, and make it mandatory for all employees to change their password every three months.
Cyber Security Key Takeaways
Any size business can be affected by a cyber attack
Most small business owners do not have the appropriate procedures and precautions in place to protect their business from cyber threats
A cybersecurity attack can have a detrimental financial impact on your business
There are small steps you can take today to reduce your risk of falling victim to a costly cyber attack
