Combating the Volatility of Insurance Premiums: Captive Insurance

As natural disasters, pandemics, inflation, rising interest rates and global events continue to influence the market, businesses continue to find themselves challenged by rising insurance premiums and harder-to-place policies.

Even so, not all is lost. We currently work with a number of clients that enable them to be less reactive to the market and have more control over the level cover they can obtain, as well as the premiums they have to pay.

Previously, I discussed Parametric Insurance: a form of insurance that lets you obtain coverage for all natural catastrophic perils, across all trade sectors and geographies – irrespective of whether they have received losses or not.

Another approach to having more control in a challenging insurance market is through Captive Insurance. Captive Insurance brings with it a number of potential tax benefits and reduced insurance costs – read on to find out more.

Introducing Captive Insurance

Captive Insurance is when you, the insured, produces a ‘captive’. A captive is a licensed insurance company that is fully owned and controlled by you. It is set up to be insured against your company’s (or your affiliate companies’) specific risks.

There are several benefits to this approach, including:

• More control over insurance allocations
• Stronger command over policy terms and conditions
• Tax benefits: reserve funds held by this insurance company can potentially be tax deductible
• Insure against risks that may not be as obtainable through traditional means
• Cost benefits: the potential for lower premium payments
• A strategy used for better cash flow control
• Revenue generation through underwriting profits

 

How does Captive Insurance work?

Captives are insurance companies set up by you, the insured, to give your company more control over your risk as well as any potential losses you may incur over the course of your business.

The core difference of Captive Insurance from traditional insurance options is that with traditional policies, your cover is often at the mercy of your insurer: your insurer decides if you are entitled to your claims, what kind of cover you can obtain as well as the premiums you have to pay.

Through the use of captives, companies will have more granular control over their insured risks as they understand how their business operates more than any other insurer would.

Typically, the reserve funds held by your captive to offset the potential of future losses can be tax deductible. Further, captive entities are legitimate entities – they are utilised by both Australian and multinational organisations (including private, publicly listed and non-profit organisations) throughout the world.

Who is Captive Insurance for?

Captive Insurance is a strategy used by entities of all types, including, as mentioned above, private, public and multinational organisations and non-profits. It is a strategy implemented by organisations in numerous industries such as pharmaceutical, energy, telecommunications, tech, healthcare, automotive and more (contact us to see how it can work for your organisation).

Although a widely used strategy, one thing to note is that Captive Insurance does have a high barrier to entry. It is often only recommended for companies with exemplary loss histories (and continued lower loss expectations) that have a premium size of at least $1 million.

You must also have the resources in place to set up an insurance company that can provide cover for potential losses. As well as requiring to work hand in hand with qualified business insurance brokers (such as us), the captive may also need to engage with attorneys, administrators, accountants, tax advisers, managers, directors, bankers and other experienced professionals. The costs required of the captive will also scale with the complexity and demands required of it.

Further, Captive Insurance also often goes hand-in-hand with traditional insurance options and often does not work on its own. One mustn’t see Captive Insurance as a blanket solution to your risk management, but instead as another (potentially advantageous) tool in your insurance toolbelt.

Before pursuing a Captive Insurance strategy, we recommend doing the due diligence and speaking to us to discover the strengths and weaknesses of this approach. A captive setup does not guarantee ideal outcomes.

More cost-effective ways to invest in Captive Insurance

If the costs of Captive Insurance seem daunting to you, one way you can achieve risk transfer at the fraction of the cost of typical captive strategies is through Protective Cell Companies.

In a nutshell, a Protected Cell Company (PCC) agreement can be suitable for companies that want to benefit from alternative risk transfer or financing but do not have the necessary scale or appetite to form their own captive.

In partnership with the Steadfast network, we work with clients to establish captives in Guernsey, which is recognised as a hub for financial insurance companies around the globe.

Stay tuned for my next post where I go into detail on how a PCC agreement can work to your advantage.

 

Want to know how these strategies can work for your organisation?

Although insurance may seem complex and challenging in this current market, the right tactics can still bring advantages to your business. If you would like to discuss how any of the above strategies are benefiting our clients, don’t hesitate to contact us – we’re more than happy to help.

 

 

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This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
For further information or comment please email info@crucialinsurance.com.au.

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