Insurance can be considered a necessary evil, until you suffer a catastrophic loss. While certain types of coverage require the services of a traditional insurance provider, captive insurance could be a viable option for those entities that have liquid assets that they want to reinvest in themselves with the added benefit of setting their own policy terms.
“Similar to self-insurance, captive insurance allows you to maintain greater control,” suggests Richard Cayne of Meyer International. “There are certain minimum requirements, but after that, you can customize your coverage to fit your needs in ways that traditional firms may not be willing to. In the past, this option was only available to big corporates with deep pockets. Now, even smaller, private entities can find a captive insurance solution that suits them.”
You can write your own ticket. Almost.
Most traditional insurance companies have been at this so long that they are now experts at carving out exceptions or setting limits so your premium or deductible ends up being extremely high while still leaving you feeling exposed to unrecoverable loss.
Since you would be in a way self-insuring since you would have to pay for those uncovered losses, you may want to consider a captive. Captive insurance may be a solution if you have the right amount of initial capital and can negotiate proper terms with a re-insurer or underwriter. You may still need them to help cover certain types of losses. In certain situations, you may want them to cover higher amounts of losses and use your remaining investment to cover smaller claims or special claims.
More than just insurance coverage
If done correctly, you’ll start by saving money on premiums. Also, you would have put operating assets into operation by investing in the insurance, so those funds have a level of protection as well. Then, if do have the misfortune of needing to make a claim, you can expedite the process as needed (You are filing a claim with yourself after all), and you’ll have greater control over counsel, forums, and any further investigations or negotiations that may come up. This is all in addition to the tax benefits.
The assets placed into the captive’s reserve are still under your control, so you have available funds in case you need to them. Consider it the ultimate in “rainy day” accounts. And you can use the captive’s existence for employee benefits, either through coverage or through offering an equity stake, since the captive would become an additional profit center.
Make sure your bases are covered
Ultimately, we’re still talking about insurance, so if you decide to travel this road, you must make sure that the captive can properly fulfil its insurance functions. So, you’ll still need to consult with experts to make sure that everything runs smoothly, such as actuaries, underwriters, and attorneys. If you try to go it alone, at the least you’ll risk losing when it comes to actual claims, at the most, you may face legal prosecution or investigation. But this is easily avoided with the right advice and preparation.
“Done correctly, this is more than just bespoke insurance coverage. This is a viable option to protect wealth not just through asset allocation, but also through loss mitigation,” Richard warns.
Richard has partnered with insurance specialists from the UK and the Cayman Islands to better investigate and analyse risk management choices for select investors and entities. He would be more than happy to help you decide if captive insurance is the right path for you.
