Forming captives to minimize risk: captivating idea or costly mistake?

Captives are reinsurance mechanisms companies use to exercise greater management of risk. A captive is an insurance vehicle owned by the company’s policyholders. Companies interested in forming a captive must understand they are getting into the insurance business, and that entails using their own money to settle claims. For smart companies, however, captives offer a chance to manage risk effectively, make an underwriting profit and use the captive as an investment vehicle.

While deep-pocketed companies may have the resources to go it alone as a captive, it is a time-, capital- and resource-heavy undertaking. A group captive, where a company is invited to join a group of like-minded companies that adhere to risk management best practices, is another way to get into the captive field.

From a macro perspective, companies seeking to form captives are entering a business where the long view is the right view for success. Captives are not for companies looking to make a quick buck over a short period of time. Captives are designed for the long-term strategy of risk management. They are most effective for companies who want more control over their risk and understand their alternative risk management needs.

Forming a captive may not be for everyone, and consulting an insurance professional is a sound decision before proceeding. A good broker can help lay out the risks and rewards of a captive, including a rundown of the potential capital reserve requirements, which can vary and are in something of a state of flux at the moment. And should a company form a captive, a broker can be an invaluable resource to ensure the business is running smoothly.

Want to learn more about captives? Talk to a Plexus Groupe professional by calling us at 847.307.6100 (Chicago) or 972-770-5010 (Dallas / Oklahoma City), or contact us via the Web at plexusgroupe.com.

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References

Adoor, Craig.Using captive insurance to create value for your company.” Lexology.com (Husch Blackwell LLP), November 20, 2015. Hsieh, Lawrence. Picture set to clarify for captive reinsurance regulatory muddle.” Reuters, November 24, 2015.