December 8, 2017
Guest Column by Mark L. Kingston, Senior Vice President, Eastern Insurance
When it comes to business insurance, the traditional insurance market leaves companies susceptible to market cycles in which their premiums increase despite their excellent claims history. That’s because insurance companies set their rates by averaging claims by class-of-business and then apply those rates to their customers.
As a result, the very best companies end up subsidizing their competitors who have more losses than they do. This doesn’t seem fair, or good for some businesses. This inherent inequity in risk protection formulas has led to the rise in popularity of captives.
For those who might not know, “captive” is insurance industry shorthand for Captive Insurance Company. A captive insurer is defined as an insurance company that is wholly-owned and controlled by its insureds. Its primary purpose is to insure the risks of its owners, and its insureds (owners) benefit from the underwriting profits and investment income as described below. Large or catastrophic claims are reinsured to protect the interests of the captive’s owners.
There are a number of key benefits that members of captives enjoy:
Lower costs – traditional insurance includes mark-ups for acquisition costs, marketing expenses, broker commissions, administration and overhead. These all add to the insurance carrier’s bottom line. In a captive the goal is to minimize costs and improve your bottom line.
Profit potential – captive members are rewarded for good risk management by being paid dividends directly related to your own loss performance. Loss funds that are not used due to excellent risk management are returned to you. Investment income that traditionally goes to the insurance company accumulates for you in a captive program.
Loss reserves traditionally are held in the insurance carriers account. In a captive the loss reserves are held in an investment account accruing investment income for you. This is more money in your pocket to invest in your business or take as distributions.
Better services and management – Captives purchase strategic insurance products such as reinsurance for very large individual or aggregate claims. Captive members can manage their predictable losses, while transferring catastrophic or shock losses to reinsurers. You are in control of your own costs, and you profit directly by having low claims.
Long-term control of your insurance destiny — As a member of a captive you can customize an insurance program that is tailored to your specific needs, not boilerplate specifications as dictated by insurance companies. As a captive grows it becomes more predictable and it can negotiate even more favorable terms with reinsurers. Insurance cycles are no longer a concern as your premium is driven by your loss history, not the stock market or insurance company performance.
Is a captive the right solution for your company? Typically, a member-owned group captive is a logical alternative for companies with these qualities:
- Long-term financial strength and stability
- Owners and managers that are committed to safety
- Loss histories that are better than average within their respective industries (so you are not subsidizing your competitors)
- Minimum casualty premiums of $150,000
Captives used to be only for the largest companies. There is a reason that all or most Fortune 1,000 companies have insurance captives. If you are interested in learning more about an insurance product that can improve your bottom line please let your RBF representative know. They will help you evaluate your needs, and consult with the experts at Eastern Insurance to structure a program that is best for your business.
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Mark Kingston has more than 30 years’ experience in the insurance industry as a manager, underwriter and sales executive. Prior to joining Eastern Insurance in 2001, Mark was with Reliance Insurance Company as underwriting director of the northeast region, and as a manager of the Boston Profit Center.