Captive Insurance vs. Traditional Risk Management

Analyzing the Differences between Insurance Captives and Traditional Risk Management

Owning and operating a business is all about freedom. You want options so you have the ability to choose what’s best for you and your company.

However, when it comes to making a decision regarding insurance, you may feel restricted. Between modern choices like captive insurance and traditional versions like general liability and self-insurance, you have a lot to consider.

First, it’s important you understand the definitions of each so they are easier to distinguish:

  • General Liability. A standard policy issued to businesses for protection against liability claims for bodily injury, property damage, and other related liabilities
  • Self-Insurance. The method of maintaining a fund to cover potential losses instead of purchasing an insurance policy
  • Mutual fund. A professionally managed investment program that trades in diversified holdings funded by shareholders
  • Risk retention group. A liability insurance company formed by the federal Liability Risk Retention Act (LRRA)

Whether you’re a well-established company or small business trying to gain footing in the marketplace, having the best, most cost effective insurance plan should be one of your main priorities. Misallocating your insurance investments will only lead to missed opportunities and lost potential for savings and profit.

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Comparing Captives to Common Forms of Investment

Alternative Risk Resources has worked with captive insurance for years, so we know which option is best, but do you? Comparing captives to traditional forms of insurance will help you not only understand captive insurance better, but will make more clear what benefits you will see after forming a partnership with Alt Risk.

Captive Insurance vs. Traditional Liability Coverage There are a few key differences between captive insurance and traditional liability insurance.

1.  General Liability Insurance: Coverage for a Price

General liability insurance is a traditional insurance option for businesses and companies. It used to be one of the most comprehensive insurances available as it covers bodily injury and property damage during ongoing or completed operations. It’s perfect for companies who have a high risk of damage in the workplace.

In the past, it has been one of the most popular insurance options, but increased inefficiency and higher workplace standards have made companies begin seriously considering alternatives. Companies seek less conventional solutions to get the edge in the market.

There's Nothing Conventional about Captive Insurance

Implementing a captive insurance policy is more involved than setting up a typical third party general liability plan. You set up an entire new captive insurance company to handle your currently unfunded risks.

You are able to set your own premiums within reason and pay off your insurance to “yourself.” This money you’re able to keep wouldn’t be a possibility with general liability because those payments would be to someone else’s insurance company.

Consider the lack of tools and equipment coverage in general liability insurance. Say a machine breaks down, who’s going to pay for it? With general liability insurance, you may end up paying more out of pocket than you’d be able to initially predict, but captives give you the financial flexibility you need to affordably preserve production in almost any situation.

2.  Self-Insurance: Almost, but Not Quite

Captive Insurance Compared to Self Insurance Do not confuse self insurance with captive insurance!

Unlike general liability insurance, self-insurance is similar to captives in the way it allows you to set aside your own fund. You’re able to decide where these funds are invested, and you have, for the first time, the possibility of making a potential profit off what you’ve set aside. It seems like a great choice compared to general liabilities, but you’re not as free as you think you are.

Captive Insurance Offers Greater Flexibility

Self-insurance is a stepping stone for companies and businesses who are trying to find the best insurance option. Although you are able to build a fund off to the side, it isn’t tax deductible and can only be deducted from if a payment is made to replace a loss – meaning your money still isn’t really yours to use freely. There’s a hint of the potential for profit with self-insurance, but it cannot be conveniently accessed.

Captive insurance is different in the way you’re able to completely control your company. Self-insurance gives you the option of control over your funds, but this control is still heavily supervised and restricted. To process any type of claims to access your funds, you need an administrator’s approval. With captives, you can be your own administrator. If you want to continue having the freedom to make your own choices, captives are the better route.

3.  Mutual Fund: It's Not Insurance

Because there is an “investment” element in captive insurance, some confuse mutual funds with captive insurance.

The most obvious fundamental difference between mutual funds and captive insurance is a mutual fund is not insurance. Investment in a mutual fund is not regarded as insurance premiums as it would be with a captive insurance plan. You might think of a mutual fund as a type of “self-insurance” long-term interest-bearing savings plan, but it’s not insurance in the “risk pooling” sense of the concept.

A mutual fund is a professionally managed investment program funded by shareholders—and is owned by a third party. A captive insurance program is also funded by shareholders, but is formed and owned by the company it insures. Mutual funds offer you great flexibility in relation to other third party insurance plans, but cannot match the flexibility offered by forming your own captive insurance company.

4.  Risk Retention Groups: Narrow Scope of Coverage

The key differences between captive insurance and risk retention groups is the way they are regulated and what kind of coverage they may offer.

Risk retention groups (RRG) may only write liability coverage. Captive insurance companies are not restricted in the coverage they may offer.

Captive insurance companies are regulated by domicile, i.e. particular jurisdictions. There is no federal law requiring business to be written in all states. Risk retention groups were created from a federal act, meaning they are exempt from some state regulations—not restricted by domicile. Other states, in theory, must admit risk retention groups. The same cannot be said of captive insurance companies.

Captive Insurance and Traditional Investment Options Captive insurance brokers at Alt Risk help you determine how captive insurance surpasses traditional forms of insurance and investments.

Captive Insurance: The Best Bet

Captive Insurance is an exciting money saving reality with Alternative Risk Resources. We offer captives for one reason only: they really are your best insurance option for your company. Unlike more traditional choices, captive insurance gives you the opportunity to insure yourself and secure greater profits.

You will be stepping a toe outside the commercial insurance marketplace, which can seem scary at first, but it’s like having access to an insurance frontier - It’s open, new, and gives you the freedom you need to increase your business’ success and profitability. There are a number of well-known companies who enjoy the benefits of having their own captive insurance programs, including:

  • AT&T
  • Boeing
  • Exxon-Mobil
  • Verizon

The process of starting a captive with Alternative Risk Resources is easy. You’re able to set your own reasonable premiums, allowing you to really begin saving money. You have to operate as a real insurance company, bearing more responsibility for your business, but responsibility and power go hand-in-hand: having more of one gives you the opportunity of the other.

Additionally, with captives, you are able to develop surplus and underwriting profits through dividends or liquidation while your funds are taxed at much more favorable rates than traditional insurance.

Contact captive insurance brokers at Alternative Risk Resources today for a free consultation.
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