You and your team should consider the captive insurance option, but the first step is a thorough examination of your business.
Based on your responses, your company appears to match the profile of a typical captive insurance company candidate. However, the competent captive insurance plan begins with a thorough analysis of your business and its insurance needs. The focus must be on both the existing coverage that you carry with commercial insurance companies and the risks that you are likely self-insuring, either because you cannot justify the cost of the additional coverage, or you are not aware that such coverage is available.
Oftentimes, business owners are thrilled with the results of such an examination. But many times, they are disappointed to learn that they cannot obtain as much insurance from their potential captive as they would like. The truth is, only after a thorough qualitative evaluation and quantitative analysis of your company will you know if you should proceed with a captive insurance company.
Consider the three tips below from my book The Business Owner’s Definitive Guide to Captive Insurance Companies as a suggested first steps in the process of making an informed decision.
1. Research captive insurance service provider options
There are many service providers in the captive insurance industry. The industry has significantly matured over the past sixty years such that many service providers offer “turnkey” service packages in which the most critical functions of your captive insurance company are handled for you.
There are inherent dangers in engaging a “one-stop shop” service, and the scope of services provided and the fees these service providers charge for doing the work vary quite significantly. Therefore, it is critical that you do your due diligence to ensure that you are working with an experience captive insurance advisor and an experience service provider.
If a captive insurance company is a strategy you intend to pursue in the future, it will be well worth your time to have performed this research.
2. Have a professional perform a qualifying study
More to the point, I always recommend that business owners retain an independent, full credentialed underwriter and an independent, fully credentialed third-party actuary to examine their business. The underwriter’s primary objective is to evaluate the risk of your business and identify areas that should be insured. The actuary’s primary objective is to appropriately price the risk that will be considered for your captive to provide coverage for your underlying business.
This type of analysis should be done on an annual basis, as your business changes from year to year and the coverages and corresponding premiums that were appropriate for one year may not be applicable in the next.
3. Obtain a business plan
Certain types of captive of captive insurance companies require that a business plan be prepared prior to the company’s creation. Others do not. However, even if a business plan is not required, you should consider obtaining one.
This report should contain a complete perspective on all the operations of your potential captive, including proposed premium rates, capitalization, profits and losses, and even recommendations on the jurisdiction in which your captive should be established.
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