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The concept of enterprise risk management has brought Captives to the forefront of risk management practices. As a business owner, the first step is to take a look at the overall risk the business faces and examine risks that are typically insured by commercial property and casualty insurance. One should also consider risks that are already self insured. A good place to start is by reading Property and Casualty insurance policies. In fact, most policies exclude the most severe types of risk—those that are potentially catastrophic. Once a business owner has taken inventory of the various risks, he must assess each risk and determine a strategy to address it. When facing a risk, the business can transfer the risk to a commercial insurance company; it can avoid the risk by cancelling the operations giving rise to the risk; or, it can look to alternative risk transfer methods, such as a Captive insurance company.

The financial benefits of Captive insurance are significant. Premiums tend to be lower simply because, with commercial insurance, premiums are padded to cover the insurance company's own profit margins and overhead costs. With Captive insurance, companies are not attempting to make a profit, but simply to provide themselves with low cost insurance coverage. Captive insurance is more flexible than traditional insurance, because the company can adjust the proportion of assumption of risk or the amount of reinsurance depending on how soft or hard the market is.

Another benefit of Captive insurance is claims management. With “in-house” insurance, a company cuts through the red tape and bureaucracy associated with traditional insurance companies. The parent company can dictate the procedure by which claims are processed. Perhaps one of the biggest benefits is that excess net premiums can be recouped by the parent company when claims are low, and they can increase reinsurance for riskier areas.

Like traditional insurance, Captive insurance can cover several types of risk. Captive insurance can underwrite public and product liability, physical property damage, professional indemnity, employee benefits such as medical aid and employer’s liability just to name a few.

Captive structures have long been marketed by insurance brokers as a way to control and stabilize the cost of insurance, but these brokers often fail to maximize the benefits of a Captive. Captive insurance companies are often overlooked and misunderstood because their costs and benefits are not simple to explain.

While Captive insurance companies can be a great financial tool, they are not right for every business. In order to create and operate a successful Captive insurance program, the operating company must generally have two or more of the following characteristics:

  • Profitable operations with taxable income ranging from $1.5 to $100 million

  • Self Insured or uninsured business risk of $250,000 or more*

  • 100 or more employees

  • Commercial insurance expenses of $500,000 or more

*generally but not always

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