Alternative Risk and Captives

Captive insurance is a form of alternative risk transfer used by major corporations, nonprofit organizations, and medium-sized businesses who want to retain some of their own risk (instead of purchasing insurance from a standard market insurer). Captives can be an attractive option for companies who find a limited availability of certain types of insurance coverage in the commercial market or find that those coverages will be a significant expense.

Why Do Organizations Choose Captives?

When a company is challenged with securing coverage for a particular risk or finds the cost of coverage to be prohibitive, captives may be an effective solution. Captives are complex – and aren’t appropriate for every organization – but when structured properly they provide a variety of benefits, including opportunities to:

• Earn investment income on loss funds and maintain underwriting profits.
• Negotiate predetermined premium and collateral formulas with the fronting insurance carriers, which support structure, tax, and investment program decisions made by the owner(s).
• Fund actuarially determined losses while reinsuring catastrophic exposures.
• Experience greater cost predictability and less premium volatility, especially when the insurance marketplace attempts to stabilize catastrophic losses by increasing premiums across all policyholders.
• Enjoy the benefit of unbundled services when service providers work directly for captive owners, enhancing claim management, loss control, and cost efficiencies.
• Improve claim portfolio results by having greater control of claims.
• Select your own team (including attorneys, investigators, and expert witnesses) to support an overall claim mitigation strategy.
• Design specific loss control programs while instituting measurable and accountable protocols designed to reduce loss and injury rates.

How to Get Started

Captives can be valuable strategic risk management tools, but they are not the best approach for every organization. For some risk profiles, they are not feasible, and could ultimately cost more than traditional insurance.

First, you will need to complete a comprehensive feasibility study, using external counsel to help you assess whether a captive is an appropriate solution for your organization. If you determine captives are right for your organization, it’s critical to engage professionals experienced in actuarial, accounting, tax, and legal issues to help you set it up.