Four Key Questions When Considering a Captive
Construction Insurance Options: Captives
Captives are established to finance the risk of a parent group or groups and sometimes these groups’ customers. It can provide advantages in risk management, insurance savings, wealth transfer and taxes to contractors and other industries with traditionally large exposures and/or premiums.
How Does a Captive Work?
The owners of several construction companies may decide to retain some of their own risk and form their own insurance company, called a “captive insurer,” instead of purchasing insurance from a third party carrier. This is an attractive option for companies who find a limited availability of certain types of insurance coverage in the commercial market or find that those coverages will be a significant expense. The primary jurisdiction in which the captive insurance company is organized is called a “domicile.”
Benefits of Captives
If properly structured, captives can bring the following advantages:
- Reduced cost of risk
- Cash flow benefits
- Coverage not available from commercial insurers
- Direct access to the international market of reinsurers
- Increased bargaining power with commercial insurers (if the captive holds a percentage of insurance)
- Cash flow advantages on income taxes – premiums paid to a captive insurer can be tax-deductible, depending on several factors
Is a Captive Right for You?
Captives can be valuable, strategic risk management tools, but they are not the best approach for every organization. For some risk profiles, they are not feasible and could ultimately cost more than traditional insurance. If your business is considering setting up a captive insurer or joining one, consider the following questions:
- Is insurance too costly? To overcome start-up costs and ongoing operating expenses, captive programs are best for construction companies paying near or over $1 million in premiums annually. If your company is well above that threshold, self-insurance is a good option.
- Do you have a sound risk management program? An ideal candidate is a construction company or contractor that’s still experiencing annual premium increases even with a good historical loss experience and robust risk management program. Having a sound safety and loss program are key to keeping costs at a minimum in the captive.
- Are you comfortable with risk? Captives are essentially a form of self-insurance, especially for single parent captives. If an unexpected loss occurs, it will negatively impact the profits of the parent group. If your organization is risk adverse, a captive would not be the right choice.
- Do you have a senior program manager or someone to be in charge? Captives are subject to accounting, tax and regulatory guidelines that are foreign to most contractors. Many projects fail without a dedicated project leader.
We’re committed to helping you implement the best risk management solutions for your business. If you have any additional questions on captives or other alternative risk solutions, contact us.
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