Is captive insurance really that captivating?
Yes! Non conventional insurance programmes are generally used for larger organisations and complex risks. There are many types of program but let’s focus on captives. A captive insurer is designed for organisations who put up their own capital to pay claims under an agreed excess/retention limit.
What is captivating is the organisation will set up a domiciled subsidiary in a part of the world where they can operate as a licensed insurer eg, Bermuda and Cayman Islands – both nice places to have the AGM! The organisation then has control over investment policy, claims, reinsurance and underwriting terms. The captive company’s sole purpose to exist is to
1. Self insure and pay the claims of its organisation
2. Benefit from the freed up capital normally tied up with the insurance company
3. Replicate the insurance activities of a conventional insurer and deliver savings
The fundamentals of insurance are to protect assets, mitigate loss, transfer risk and compensate organisations in the event of a loss. Non conventional insurance programs across motor, property and liability do it a different and intriguing way to the conventional market.
Controlling and reducing the frequency and severity of claims lies at the core of this approach. Risk management is key and a robust programme needs to be produced to deliver real benefits.
Initially insurance premiums are reduced as the organisation will only pay the proportion of the premium above the agreed excess limit. Now, consider the scenario where the captive matures into it’s 3rd or 4th year, claims are reduced and surplus capital generated. The organisation can choose to increase their own retention limits, absorb more claims and further reduce premiums paid to the insurer. The captive exist in it’s own ecosystem away from conventional insurance market fluctuations.
Bespoke Cover & Tailored Fit
If the products offered by conventional insurers do not fit the needs of the organisation then becoming a captive is a great option. Non conventional insurance programs are designed to be bespoke. Terms can be developed to dovetail with the organisation’s needs. Each non conventional insurance program is unique to the organisation is was designed for. The cover is based on what the organisation needs be it wider or more restricted. The crucial point is premium isn’t wasted on cover that isn’t needed.
Freed Up Capital
Funds are created to pay claims below the retention limit. Extra capital isn’t needed as cash is internally released and generated from a variety of in-house sources. Money is retained that would otherwise be used for larger premiums with conventional insurance policies.
1. Savings on insurer costs and expenses, typically for insurers this equates to 40% of conventional premiums whilst the captives operate at 20%
2. There are savings on IPT on the premium saved too. Currently this sits at 12% but the current trends suggest this figure will rise in the future.
3. Profits for insurance companies from investments are piped back to the organisation. Normally an insurer will use part of the premium to invest in stocks. With non conventional insurance the reduced premium releases capital back into the organisation and not the insurer. Furthermore the captive can invest the money themselves.
It’s worth noting that the extra funds can be used to invest in risk improvements early in the policy thus benefiting the company from day 1. When contrasted with conventional insurance discounts are given at the end of the policy year after the risk improves.
Non conventional insurance is a viable alternative to conventional insurance for the right risks. It isn’t as complex as it seems and when explained properly the benefits are easily understood. It is a great way for all parties to evolve beyond a conventional program. The organisation learns to control its own insurance activities such underwriting, claims administration and better risk management. There are inherent dangers because they put their own capital at risk in the hope of better financial rewards. The key is to leverage the price stabilisation, the wider bespoke cover, improved cash flow and captivate its stakeholders with increased profits.