November Captives Blog

Alternative Risk Considerations

11/09/2023 Written by: AP Captives

Alternative insurance programs can be a powerful tool for businesses to manage risk effectively and potentially save costs on property and casualty coverage for a company. “Challenges in the current insurance market are causing middle-market and upper-middle-market organizations to take a hard look at alternative risk transfer solutions,” says Nick Napolitano, Captives Practice Leader for AssuredPartners. However, Napolitano cautions business leaders that it’s essential to approach these types of programs with a clear strategy, in-depth knowledge, and the guidance of professionals specializing in these financial management strategies. Consider the following information to help you decide if an alternative risk strategy is the right solution for your organization.

Alternative Insurance Program Basics

What is captive insurance? Captive insurance is a financial risk management strategy that allows a business to set up its own insurance company to cover its unique risks. Instead of purchasing policies from commercial insurers, the business creates a “captive” to provide coverage.

Why captive insurance?

  • Tailored Coverage: Captives offer a more customized insurance solution, aligning with a company’s specific risk exposures and needs.
  • Cost Control: Businesses can potentially reduce insurance costs through investment earnings from underwriting profits.
  • Risk Management: Captives promote proactive risk management, as the company has a direct stake in minimizing losses. Careful analysis of other captive members means everyone shares a commitment to the safety and welfare of their employees and assets.

Captive Considerations

“This is where working with captive professionals is imperative. Whether joining an existing captive or starting your own, the decisions made are for the long-term and intended to support a company’s goals,” says Lori Harris, AAI, CPIA, Captive Director.

Harris explains that the Captives Team at AssuredPartners can help business leaders clarify their financial and risk management objectives. She adds, “The expertise of the AP Team cannot be overstated. Their familiarity with statutory regulations and compliance provides invaluable insights. The team’s expertise can help organizations decide the best captive structure for their business and guide them through the process to build a successful program.”

Types of Captive Insurance:

  • Single-Parent Captives: Owned by one company to cover its own risks.
  • Group Captives: Multiple companies join forces to form a shared captive for mutual benefit.
  • Rent-a-Captive: Smaller companies can “rent” the services of an existing captive.

Considerations When Setting Up a Captive:

  • Feasibility Study: The AssuredPartners Captive Team will work with you to assess the financial, regulatory, and operational aspects of setting up a captive for your company.
  • Legal Structure: Their expertise will help you choose a domicile (location) for your captive, taking regulatory requirements into account.
  • Capitalization: They will review the funds necessary to meet regulatory capital requirements with you.
  • Risk Management: The Captive experts at AssuredPartners will help your organization develop a risk management strategy and insurance program unique to your company’s exposures.

Regulation and Compliance: Each domicile has its own regulations. Ensure you comply with local laws and work with experts in captive insurance to navigate the regulatory landscape.

Pros and Cons of Captives
While alternative risk management strategies offer opportunities that can benefit your organization, there are also challenges. Our team of experts is ready to answer any questions regarding the pros and cons of captives.

Benefits of Captive Insurance:

  • Cost Savings: In a captive, your business can potentially reduce insurance premiums and administrative expenses.
  • Risk Control: Your organization gains enhanced control over risk management and claims processes.

Challenges:

  • Regulatory Compliance: Staying up-to-date with changing regulations can be complex.
  • Capital Commitment: Initial funding and ongoing requirements can be substantial.
  • Market Fluctuations: Captives can be affected by investment and insurance market volatility.

The Captives Team is uniquely qualified to support you as you move from traditional insurance to an alternative risk management strategy. If you would like more information regarding how we can assist your decision process, contact us at captives@assuredpartners.com to talk to a team member about all your options. There is Power Through Partnership.


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