For many modern businesses, a traditional insurance plan lacks the control and flexibility they desire. Insurers may be reluctant to underwrite certain types of emerging risks and there are no rewards for a company with strong risk management policies and a positive claims history.
That’s why a growing number of companies are replacing traditional employee health insurance plans with captive insurance solutions, which can provide myriad advantages.
However, a captive may not be right for every company.
To help you make the most informed choice for your business and its employees, let’s review the pros and cons of a captive insurance option.
What Is Captive Insurance?
Traditional group health plans are created and controlled by a third party that shoulders all of the risk. When you join this plan and pay your premium and deductible, covered risks will be paid out on your behalf.
On the other hand, a captive insurance company is owned and controlled by its insured. As such, the insured incurs all the risk in exchange for potential rewards. This type of self-insurance can take on several different forms, including:
- Single parent captive
- Group captive
- Rent-a-captive
Pros of a Captive
As an alternative solution to a traditional insurance plan, captives offer three key benefits, which we’ll explore below.
#1 Improved Control
Traditional insurance is designed for the average person, not the individual. They tend to be risk-averse and more generalized. As a result, the insurance plan may not provide coverage options for many of the risks your business may require, including:
- Loss of reputational value
- Failure of operational resilience
- Business interruption following a cyber event
A captive allows self-insureds to tailor a policy to their specific needs. You may be able to access coverage that might otherwise be unavailable or overly expensive to obtain.
#2 Better Transparency
Since captives are owned and operated by the insured, you have greater access to real-time data relating to:
- Claims data
- Medical diagnoses
- Provider usage
- Types of service
You can also unbundle components of a premium to better understand pricing and rates. This information can then be leveraged to dictate risk management policies and controls you set to improve performance.
#3 Potential for Reduced Costs
With captive self-insured plans, your performance determines the cost of your plan. In exchange for shouldering the burden of risk, captive health insurance enables businesses to reduce their company’s healthcare spend in three tangible ways:
- Reduced fixed costs – With a traditional, fully-insured plan, costs are 100% fixed. Even if you have low claims, there’s no benefit. With a captive solution, your fixed costs will drop if you maintain a strong claims history.
- Underwriting gains – Premiums are pooled annually to be retained or distributed. If a company can effectively control its losses, it’ll enjoy underwriting profits.
- Investment income – In addition to increasing cash flow, captives can earn investment income on loss and unearned premium reserves.
Cons of a Captive Insurance Plan
Depending on the business, there may be some potential drawbacks to a captive plan. These include:
- Increased risk – With a captive, the owner-insureds put their own capital at risk. If a company experiences a high number of claims, that capital could be lost. This is why it’s important to have robust risk management policies.
- Initial start-up costs – There are various barriers to entry if you plan on forming your own captive, including capitalization requirements, as well as formation and legal fees. But much of this can be mitigated by joining an already established group captive.
- Quality of service – Since this is a self-based product, the quality of service may depend on your actions and efforts.
Clark & Lavey Group Captive Insurance Solutions
Captives are changing the insurance industry, enabling a business to have greater control, transparency, and cost savings. And with the right group plan, you can neutralize many of the potential drawbacks.
That’s what Clark & Lavey’s InCap® Solution was designed to do. With low premiums and an average of 27% profit share of unspent captive dollars returned, InCap is a winning alternative to traditional fully-insured health insurance plans.
If you want to learn more about how a captive program could help you start saving, reach out today.
