Making the Business Case for an Insurance Captive

February 18, 2020

Most companies, including mid-sized organizations, tend to think of only one insurance model – pay an insurance company a premium for coverage and to help manage specific risks. This is a sunk cost that you may have little control over. Insurance captives provide a different model, removing the sunk cost, while still obtaining the necessary coverage and property and casualty services with greater control. Many executives are aware that making the change from a traditional insurance model to a captive is the correct move for qualifying businesses, but they lack information or have misconceptions about how they work.

What is an Insurance Captive?

A captive is a wholly-owned subsidiary providing risk financing and management services to the parent company for specific risks. In some ways, captive insurance is not unlike a Health Savings Account (HSA), just on a much larger scale. Rather than engaging an insurance company to assume risk, an organization sets aside money to pre-fund future claims.

Captives are primarily used by business owners for workers’ compensation, general liability, and/or automobile exposures, as well as product recall, construction defect and warranty coverage. A captive deploys company capital more efficiently than traditional insurance by reducing the total cost of risk, generating more profit and shareholder value.

How to Present an Insurance Captive to the C-Suite

In her article “How to Blow a Presentation to the C-Suite,” Sabina Nawaz identifies several specific areas to be aware of when presenting to corporate executives. Our “Educate to Innovate for Results” approach aligns with the author’s points to help the c-suite fully understand the benefits and drawbacks of an insurance captive.

  1. Define the problem. Too often, there is excitement around a good idea and the presentation is focused entirely on the solution… without considering the context of the problem and a pathway for the answer to be successful. In order to provide a thorough understanding, we must ensure the audience has a clear knowledge of all aspects of the problem being solved. How much money is currently sunk into insurance premiums? How would this change help grow the business in the future? Does the current insurance broker have the required expertise?

  2. Present the solution to the problem, and how it will support the business. First, we give an explanation of what an insurance captive is and how the business will utilize one. Then we show the financial and time investment for administration: How much money will be diverted away from insurance premiums and into the captive? How will that look in the future? What are the cash flow and tax benefits? What is the ROI?

  3. Leave plenty of time for interaction. Forming a captive for the first time may seem like a radical solution (though most organizations are thrilled with the results). Several meetings with in-depth analytic pro forma, continued discussion and questions will ensure the solution receives the attention it deserves and help executives to visualize the change before it occurs.

The importance of data, research, and preparation cannot be overstated. Taking the time to think through the details in the business case will make all the difference in both a successful initial discussion, and a rewarding transition.

If you are interested in learning more about insurance captives, we can help. At Alera Group, we focus on helping organizations lower their overall cost of risk, not just their insurance premiums – an approach that often creates a competitive advantage and significant opportunities for meaningful savings over time. Learn more about our collaborative approach to property and casualty at URL.