Article

Premium Stability

One of the key advantages of captive insurance is the ability to achieve pricing stability. As a captive matures and accumulates capital and surplus, it becomes better equipped to retain risk and insulate itself from fluctuations in the commercial insurance market.

This stability is particularly valuable during hard market cycles when traditional insurance coverage may become limited and more expensive. Captives typically need to take a conservative approach to premium setting, especially in the early years to ensure proper funding. This strategy helps build sufficient capital to pay claims and withstand unforeseen events.

As the captive develops a track record and accumulates sufficient capital, premiums are typically adjusted using actual loss experience rather than broader market trends. This approach provides captive owners with a potentially significant competitive advantage as they lower their total cost of risk (on both a gross and net basis) when compared to their standard market peers.  

Potential for Rate Decreases

Several factors contribute to the potential for rate decreases in captive insurance programs:

Improved Loss Experience: Captives incentivize better risk management practices, as the parent company directly benefits from reduced losses. This alignment of interests places greater focus on safety and loss control.  This typically leads to improved claims experience over time, resulting in greater predictability of losses, more accurate budgeting forecasts, and increased captive underwriting profit and investment income. 

Underwriting Profits: Unlike traditional insurance, where underwriting profits go to the insurer, captives retain these profits. As loss experience improves, these profits/surplus can be used to reduce future premiums, diversify the captive's regulatory approved Investment Policy Statement, or be returned as dividends/distributions to the shareholder(s)

Investment Income: Captives earn investment income on premiums collected before claims are paid. This additional revenue contributes to the overall financial health of the captive and places the captive in a more competitve position when compared to the standard market. 

Actuarial Adjustments: As a captive accumulates its own loss data, our actuaries typically weigh this information more heavily than external market data when determining future premiums. This often results pricing that is a more accurate representation of the risks and operations of the insured businesses. 

Considerations

While the potential for premium stability and rate decreases is significant, it's important to note that these benefits typically materialize over the long term. Businesses considering captive insurance should have:

• A strong financial position - The ability to not only take the insurance risk, but also post collateral for credit risk obligations.
• A good claims history - Typically less than 40% incurred loss ratios but can vary based on line of business and type of loss.
• A commitment to risk management - The ability to prove that prior loss performance is a result of good risk management and not just luck. 
• Sufficient premium volume - Generally at least $500,000 for "vanilla" exposures with minimum of at least $1,000,000 for more hazardous trades and severity based exposures.
• Long perspective - Captive insurance is a strategic, and potentially transformational, way for businesses to take risk.  Shareholders should be prepared to retain risk for at least 3-5 years to more fully realize captive benefits. 

Curious to see if your business can take advantage of the premium stability provided by captive insurance?   Contact us today and we'll provide you with the information necesary to determine if captive insurance ownership is right for your business.