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Take financial control and manage risk with captive insurance

Aug 25, 2023

As the price of commercial insurance continues to skyrocket, many organizations are considering the potential advantages of self-insurance to obtain the coverages they need and to manage their costs.

Premium in some of the highest risk areas, such as cyber insurance, surged 50% in 2022 because of increased ransomware attacks, along with fast-rising demand for coverage itself. And that’s if you can even get it. Some providers are no longer writing new policies or are declining renewals because of the escalating risk.

Climate change is also hitting the insurance industry hard, driving up prices and pushing insurers out of high-risk markets. Even rates for primary general casualty and product policies are rising 10% to 20% annually.

Fast-growing labor costs in many industries are also driving up third-party premiums to levels that may not make sense for your organization anymore.

Indeed, self-insurance may be your only viable option these days. And captive insurance is something businesses of all sizes are looking at more seriously. Captive plans effectively require creating a company wholly owned by your noninsurance organization that underwrites the risks of the group. And it’s often the most cost-effective way to obtain coverage. 

Captive growth for mid-size organizations

While more than 90% of Fortune 1000 companies have formed captive insurance entities, there is value in reviewing how efficiently their captive is being used. Additionally, attention to the captive option is continuing to grow among mid-size and smaller organizations.

While any kind of commercial insurance risk can be insured through a captive, the areas where market pricing has been thrown off most are prime candidates for a captive. Captive insurance has long been a leader where the commercial market has lagged. A captive underwrites the risk for the operating subsidiaries of the parent company. It can function either in lieu of or to fill in gaps in commercially written coverage on certain risks and liabilities such as those posed by cyberattacks, windstorms or wildfires.

Captive insurance companies can provide financial, cash and tax benefits. In addition to relief from cost pressures, captives build a more self-sufficient funding dynamic that relies on accrued income of the organization. 

Not-for-profit organizations, especially those involved in serving youth, are another area where interest in captives is growing. That’s because abuse insurance costs are exploding because of massive liabilities faced by some groups and religious institutions.

Financial benefits

Here are key benefits of creating a captive plan:

  • Stabilizing risk financing over time: Optimizing an organization’s risk retention through a captive potentially shields the parent from insurance market volatility.
  • Improved insurer purchasing power: Bundling the organization’s risk through one entity may improve its purchasing power.
  • Direct access to the reinsurance market: Reinsurance carriers may offer better rates, coverage and/or services. Additionally, this can help should a specific type of risk become uninsurable or overly expensive.
  • Cycle management and independence: The ability to retain more risk provides the organization with greater independence from capacity available in the insurance market. Through the captive, the organization can choose to retain risk depending on market cycles.
  • Potential for accelerated tax deductions: A captive can deduct reserves in the current year, in contrast to noninsurance companies that can only take deductions in the year they actually pay claims.

To determine whether a captive is right for your organization, it’s important to determine what you could potentially be saving through a captive plan balanced against the startup and ongoing costs to maintain it, including governance and administration, reinsurance, regulatory licensing and advisory services. Broadly speaking, an organization with at least $2-$3 million in premium costs or $2 billion in assets would likely benefit from exploring a captive.

How Wipfli can help

Wipfli’s insurance team, with its multidisciplinary background, has extensive experience to deliver advisory services that best suit your organization. We can help you determine whether a captive program is right for you and help you structure, implement and manage it. We can also review an existing captive plan and help you navigate any needed changes. Contact us to learn more.

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Gregory J. Domareki
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