Hold Me Captive, I Love It!
Are you tired of paying insurance premiums, not filing many claims, and never seeing it again? Consider an insurance captive.
The commercial insurance market is ridiculous.
Rates are going up, and service is going down. Your relationship with your insurance provider is rocky and adversarial.
But there's hope. Enter the insurance captive.
Insurance captives ("captives") have been around for decades, but in the last 5 years, they've become more and more accessible for companies with smaller annual premiums.
What is a captive?
Captives are legitimate insurance companies, with each member being a shareholder. 100 members? Each member owns 1%. Most captives share the following characteristics:
They only let strong-performing companies (from a claims history perspective) join. If you're past claims history sucks, you likely won't get in.
You are on the hook for paying your own claims up to a specific limit. Call this the "A fund."
You and the rest of the captive members are on the hook for the next level of claims. Call this the "B Fund." (Yes, you'll chip in to pay a portion of another member's claims if the claim exceeds the "A" fund. This is why bullet 1 above is essential. You don't want to be grouped with high liabilities.)
Because of a captive's "risk sharing" nature, captive premiums are tax-deductible under IRS rules and regulations. (Just like your traditional premiums.)
If a claim surpasses both the "A" and "B" funds, the reinsurance purchased by the captive kicks in.
If you perform well in a given policy year (meaning few or no claims), you get a chunk of your policy back in 3-5 years, plus the associated investment income. Win!
Our companies are nearing their third anniversary of joining an insurance captive. It's been a massive benefit for us.
If you're considering one, let me share the good and bad we've experienced thus far.
The Good
A Collaborative Approach
When a claim occurs in a traditional insurance setting, it often feels like the business and the insurance company are adversaries. There is little motivation from the carrier to settle things quickly and cost-effectively. This leads to more significant claims and subsequent premium increases at renewal.
In a captive, you, the captive, and the claims manager (employed by the captive) are all aligned and motivated to quickly close out claims in the most cost-effective manner possible.
Why? Because fewer/lower claims mean more returned premiums for you, better performance for the captive itself (making the captive healthier and more attractive to new members), and better approval ratings for the claims management team (who wants to keep their contract with the captive).
Reimbursed Premiums
There's nothing quite as frustrating as paying insurance premiums year after year, not filing many claims, and never seeing the money again.
Captives are a great way of actually getting money back if your company performs well and minimizes claims.
Additionally, while your premium is "sitting" in the captive, waiting to be used for claims or distributed after claim years are "closed," it is invested in various conservative securities. Should there be investment returns, these are also returned to you when distributions take place.
Improved Safety Culture
Due to a captive's "merit-based" DNA, companies that join almost always up their safety game. A significant portion of captive board meetings and resources provided by the captive center around safety, proper claims handling, and reducing risk for your team members and customers.
A great example is dash cameras. After hearing so many stories in the board meeting about the effectiveness of these devices in reducing auto collisions and distracted driving, we bit the bullet and installed them in our fleet. The captive helped us negotiate favorable rates with the vendor and even chipped in to pay for the hardware itself. We've since used dash cameras many times to help protect our company and our team from false roadway accusations.
Networking
When you join an insurance captive, you immediately join a group of peers with similar characteristics and mindsets. Captive members are serious about running their businesses and keeping their teams and customers safe.
You also get to know each other at board meetings and inevitably make connections with other business owners. I've met amazing operators within and outside my industry and learned much from them.
Board Meeting Travel Opportunities
Many insurance captives are domiciled in the Grand Cayman. This allows them to invest the retained premiums more effectively. Due to being domiciled outside of the US, captives are usually required to conduct board meetings off US soil. Many captives turn this constraint into a win by holding board meetings (often twice a year) in rotating enjoyable destinations.
Since we joined, we've traveled to Cabo, Iceland, Scotland, and Grand Cayman. One of our key executives attended a board meeting in Nevis.
While 2-3 days of these trips are spent conducting business, extending the trip on the front or back end is common and a great extra perk of being in a captive.
The Bad
Like many business opportunities, you have some downsides to joining a captive. Here they are:
Rigorous Admissions Process
Joining a captive can feel like a tax audit. You have to provide extensive information to your broker that they, in turn, submit to the captive's underwriting committee.
Thankfully, the captive brokers are well-versed in the captives they "sell into" and assist along the way.
I don't know about all other captives, but the one we belong admits about a third of the annual applicants. Even good companies get rejected if they have a bad claim year on their record or operate too much in the "grey" area.
More Responsibility
When you join a captive, you join a team. Not only are your premium dollars on the line, but those of your fellow captive members are, too. You don't want to let them down.
This can create pressure and frustration as you and your management team endeavor to build a safer company. Believe me, when two broken toes can cost you $40,000 of unreturned premium, that injury (and how to prevent it in the future) will eat you up at night.
Safety Is Expensive
While becoming safer is never bad, it comes with a cost. We spend 3-5 times more now on safety initiatives, training, certifications, consultants, hardware, incentives, and protective gear than we did before joining the captive.
True, this is money well spent, as it makes the team safer. And also, the hope is that claim frequency and size reduce exponentially as more money is spent on safety. But alas, it is still a drain on the P&L.
Most business owners, by definition, like to bet on themselves. They also like to see a return on good performance.
The insurance captive concept is built for strong performers willing to put in more effort to get a chance to "earn back" premiums. Add to this the ancillary benefits of a captive, and for many, it's a great way to secure commercial insurance.
Thanks for reading this post. I appreciate you. In return, please share this with those you know who may be interested.
Book of Note: I love Beth Macy. I was introduced to her via Dopesick, her look into the underbelly of the opioid epidemic. The recent turbulence in our country over tariffs and trade reminded me of another excellent bit of business history/investigative report/biography called Factory Man. It's the story of how offshoring and importing so dramatically affected the furniture manufacturing businesses in the 1970s and 1980s, but told through the lens of a single company owner fighting to keep his workforce intact. Fascinating read.