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About Captives |
What is a captive? Traditionally, businesses have managed risk by transferring it to an insurance company or, alternatively, by retaining the risk and allocating funds to meet expected losses through an arrangement known as self insurance. Captive insurance is an alternative risk management technique (ART) where a business forms its own insurance subsidiary to finance its retained losses.. The term "captive" comes from the fact that the policy holder owns the insurance company and the insurer is captive to the policy holder. If the captive only insures its parent and affiliates it is called a "pure capitive." What are the advantages of a captive? Captives can offer many businesses increased control, cost savings and tax advantages, while satisfying regulatory requirements. By forming a captive, the parent organization takes control of risk transfer, claims management and administrative costs. o Costs: captives can reduce administrative costs and profit margins built into insurance premiums o Reinsurance: captives allow businesses to access and negotiate directly with reinsurance carriers o Claims management: in a captive, your organization directs the claims process and can increase efficiency and lower costs o Flexibility: captives provide flexibility to respond to market conditions What is the profile of a business that should consider a captive? o Any business that has a frequency of smaller more predictable claims, i.e. Workers Compensation, Automobile and General Liability claims o A closely held or family owned business can use the captive as an "estate" planning tool in a number of ways. o Businesses that have difficulty in obtaining coverage for certain types of risk Are cost savings immediate? Cost saving occurs over time, particularly as the captive grows which allows for flexible premium benefits. In the first few years, costs will likely be similar to your current situation. However, premiums paid into the captive will be earning investment income from day one. . . Is the captive formation and management process time consuming? Each situation is unique and our initial feasibility phase can provide you with realistic time and resource commitments. This analysis phase includes information gathering regarding claims, exposures and other specifics about your company and operating environment. The state or country you choose to domicile the captive may require one board of directors meeting in their state or country per year. Finally, our experience suggests that the most successful captives invest time at the claims management level. How long does it take to form a captive? While a captive can be formed in as little as six months , we recommend a step-wise process that starts with a review of your losses and current risk transfer program. You will have the opportunity at different stages of our analysis and implementation model to either proceed with the captive formation or decide not to proceed. When can the captive owners expect to be paid dividends? We do not generally anticipate dividend payments until the forth or fifth year of the captive. The captive will have had time to build investment income, have an idea of claims payments and expected claim payments by year four and five. It could be sooner given the nature of your exposures. What are the most important elements of successful captive formation and management? A pro active claims management program and a pro active loss control or safety program. We work with your company and the claims management firm to minimize losses. We also analyze your losses on a regular basis looking for patterns and or other loss indications that can be corrected by installation of some safety or loss control programs. Broker and Agent Services JM Niland and Associates offers consulting services to brokers and agents on the formation and management of captives. From full outsourcing to short-term advisory services, insurance professionals can leverage our expertise and experience to advise your clients on alternative risk transfer and management solutions. Services: o Initial captive feasibility analysis o Captive formation advisory services o Captive education and training services o Full outsourced captive management Want to learn more about how a captive can benefit your client and the growth of your business? Email us at jim@jmniland.com to request more information. |