Let’s Review with Deanna Slater, a noted authority on captives, from Arthur J. Gallagher ….
A Captive is an insurance company providing insurance to and controlled by its owner(s).
Workers’ Compensation is the line of coverage making the most sense to participate in a captive since there is long lag time when the claim is actually paid out and closed.
There are Eight Top Reasons to Consider a Captive
- Returns underwriting profits and investment income
- Reduces costs
- Improved risk management
- Control over insurance destiny
- Multi-state capabilities
- Addresses coverage or administration issues
- Improves cash flow
- Tax efficient vehicle with offshore and onshore domicile options
Let’s consider Reason #1
Return of underwriting profits and investment income is often the number one reason companies consider a captive as an alternative for their workers’ compensation insurance. After paying their premium and final audit billing they count the dollars spent and scratch their heads when they look at the dollars they had in claims for the year and ask this question:
Why would they pay say $300,000 in premium to an insurance company when they only experienced $50,000 in claims?
An all to frequent scenario leaves a company feeling they are leaving money on the table. The underwriting profit is historically what the insurance company expects to earn on an account after they pay out losses and spend their operating costs. If they can’t make an underwriting profit . . . how do they stay in business? Investment Income is the reason insurance carriers stay in business! However with the market having a bit of a tough time and insurance carriers unable to make a profit on their underwriting or their investment income, they are left with only 2 options:
- Keep rates low and go out of business (some are making this choice).
- Increase rates to start making an underwriting profit.
In a captive, a company pulls out of this insanity and pays premiums based on your OWN history not the industry performance.
You stop subsidizing your competitors and fund your own claims and in a Group Captive arrangement might risk share with other quality companies not Joe Somebody down the street.
You earn investment income on YOUR dollars sitting in your fund to pay out your claims and don’t let the insurance company take away the earning potential of your dollars. (workersxzcompxzkit)
Typically 3 to 4 years after the policy term ends, you reap the rewards as a business owner of the performance of your company’s performance and receive a dividend. A pretty good reason, wouldn’t you think!
Author: DeAnna E. Slater, CIC, AFSB is an Area Vice President with Arthur J. Gallagher Risk Management Services, Inc. in West Fresno, CA. She is a specialist in the alternative market as it relates to reducing workers’ compensation costs. Contact her at email@example.com or visit her at http://www.captiveexpert.blogspot.com/
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