Common Advantages to captive Insurance
Common Disadvantages to captive insurance
Lower Insurance Costs
Insurance premiums must be adequate to meet claims demands which is #1 priority for ALL INSURANCE Co. In addition, much like a commercial carrier, a captive insurer is also in the business of being profitable. The big difference between the two is a commercial carrier inherently has cost centers captives do not have, such as acquisition/marketing costs, overhead and profitability requirements to satisfy shareholders (not policyholders).
Commercial carriers rely heavily on investment income. Premiums paid are likely paid well in advance of claim payments which may or may never occur. The time between a claim being incurred and paid could be as early as 60 days to 6 months or more. Therefore, the business advance funds a risk and allows the insurance company to earn investment income on those funds.
By having lower embedded expenses, the captive is able to offer a greater level of protection to the business because it can purchase more coverage; if that is the desire of the business.
When the commercial market is unwilling or unable to provide coverage, the business is left to self-fund that risk. By self-funding a risk is not always the best accounting solution. A captive can issue policy types for certain risks the business is self-funding today, or, maybe a commercial policy does not cover or excludes a certain type of risk from a common policy. The captive can cover these commercial policy gaps as well.
Risk Management Focus
When a business is involved in a captive, it’s economic interest tends to shift toward mitigating the risks of the business, WHY, because if the business can effectively prevent a risk from occurring, it stands to financially gain by lowering insurance costs. In other words, if you pay a commercial carrier $100,000 premium and have no claims during that policy year, it’s not likely you’ll see any of the $100,000 in the following year. With a captive, if you pay $100,000 premium and have no claims, you will have insurance company underwriting profits.
Underwriting Benefit over Time
A common expression within captive insurance is 2 out of 5 years will be more costly then expected. But, over a 5-10 year period, the unit cost of insurance can and will decrease by way of underwriting profits earned by the captive. With medTRANS, our unique structure allows members to realize underwriting profits faster then traditional group captives.