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Insurance

Is Your Company Spending Too Much on an Annual Insurance Program?

Your company just renewed its annual casualty liability insurance for a premium of $200,000, because you have to prepare for the future. Well, what happens when you don’t have any claims and the insurance company doesn’t have to pay out anything?  Or, what about if you only have a few claims?  The answer is that an insurance company just made a large profit off of your hard work.  They keep your premium and pocket the amount that you paid in.    

One way to reduce your annual spend on your insurance program is through a captive arrangement. If you’ve had relatively low insurance claims and your safety practices are considered ‘best in class’, using a captive could reduce your insurance spending significantly.   

There are many types of captives for casualty insurance, but for this example, we’ll discuss a Group Captive.   A Group Captive is an insurance company owned and operated by captive members, strictly for the benefit of those members. Just like most Fortune 500 companies, it enables middle-market companies to increase their underwriting credibility through the benefit of collective purchasing power. Instead of an insurance company keeping the profits at the end of a policy term, a group captive divides the profits up and releases them in the form of a dividend to its members.  Generally, in some Group Captives, up to 65% of your premium is YOUR loss fund.  Whatever you don’t spend on claims is returned back to you.  Remember, you own this captive, not the insurance company.

The bottom line is this: By using a Group Captive, you are still buying insurance to protect your company.  Insurance is underwritten by an ‘A rated’ insurance company.  However, instead of your insurance company keeping all of your premiums, you have an opportunity to earn much of them back.

Since you are the owner, you also have a say in how your claims are paid out.  No longer will the insurance company just tell you, “…let’s just pay this claim.”  If you don’t want to pay the claim, it is your prerogative to give your opinion.  You have a lot more control and a voice to fight an incident that you don’t think is legitimate.   

In a Group Captive, all members are owners.  At board meetings, which take place twice a year, each member has a vote on how their Captive is operated.  There are several committees that help run the captive company, and perhaps the most important committee is the Safety Committee.  If the captive reduces claims, every one of the members will benefit.   You are now an insurance company, and the fewer the claims, the more your captive will profit. 

As your premiums are paid each year, the captive will invest those premium dollars.  This investment income is also paid out to the members (YOU).  This gives you an even higher level of return on your annual insurance spend.  In typical years a nice return on your premium payments is made for each member.

There are many aspects to consider before joining a captive.  There could be tax benefits since you are now an owner, instead of just a buyer. However, one should not make their decision to join or not, based off of a potential tax savings. 

Harmon, Dennis, Bradshaw can discuss with you to see whether or not your company is a good fit for a group captive.