Why Large Businesses Consider Captive Insurance

Large businesses that have difficulty accessing cover through traditional insurance markets due to their industry or risks may choose to 'self insure'. Captive insurance is a type of alternative risk transfer that enables a business to form its own insurance company (as a subsidiary) to provide coverage for its own risks. Through our partnership with Artex Risk Solutions, Gallagher is able to offer specific clients the opportunity to use alternative risk solutions such as captives to cover certain business risks.

What are the advantages of captives and self-insurance?

Large businesses and corporations that face considerable risk and insurance exposures may be driven to consider captives due to both challenges of traditional insurance and opportunities via the alternative of a captive self-insurance model.

A range of challenges typically drive companies to pursue captive insurance solutions, including:

• large premium increases captive insurance
• shrinking insurance capacity and/or coverage
• an annual insurance premium spend in excess of $1 million (individually or as a group of companies)
• a complex risk management strategy to operationalise
• predictable loss patterns e.g. high frequency
• uninsured or uninsurable risks where the traditional insurance market is lacking solutions
• an elevated risk profile that impedes access to prices for traditional cover.

Captive insurance can give specific businesses access to insurance solutions on more favourable terms and unique advantages, such as:

• it can enable the development of more suitable tailored insurance policies and protections
• taking advantage of the positive risk benefit of a clean claims record
• the potential to achieve greater flexibility and broader coverage than offered by traditional insurance, and alternatives to exclusions or other restrictions
• it may be possible to increase limits or capacity by using a captive to deliver more responsive and broader coverage options
• it can centralise and improve strategies for businesses to retain risks, pursue an appetite for self-insurance or co-insurance
• gaining more efficient access to the reinsurance markets
• it can enable a business to protect its corporate brand if sensitive claim issues occur
• leveraging a strong company capital base and balance sheet.

What are the business obligations involved in running a captive insurance model?

Entering into or establishing a captive insurance solution for a business is a complex and specialised area of insurance and requires considerable due diligence and feasibility upfront. Captives are subject to statutory regulatory requirements including reporting, capital and reserve requirements.

• Captive insurance requires a high level of commitment by the participating business(es). Careful assessment of the associated costs and responsibilities is essential before making a decision to form or join a captive arrangement.
• The business, or captive insurer, is responsible for all payments and allocated loss adjustment expenses, and the administration of these functions.
• Typically the insurer will also require financial security or collateral from the business to protect against insolvency or other risks.
• Businesses using captives need to reserve large amounts of capital to service claims if they arise. If the reserve is less than the sum required to meet unanticipated claims costs (such as a catastrophe event) the business will need to liquidate assets to meet the demand.
• A business is unlikely to have the same level of choice as an insurance brokerage in selecting third party service providers or may choose to go with a discounted provider of unknown quality.
• The ability to spread risk is restricted to the entities within the captive, which can make financial planning challenging and costs unpredictable. The business may have to rely on secondary reinsurance as a back-up resource.
• Due to the complexity of setting up captive insurance there may be barriers to easily entering or exiting the plan.

Interested in finding out more about a captive insurance arrangement?

Captive insurance can provide a useful alternative for some businesses with specialised needs and more than $1 million available for premium. With a range of options in structure and an involved process for arranging them, captive insurance arrangements are usually limited to specific areas of risk and best organised with the assistance of an experienced captives broker.

Our Artex captives experts can help business clients assess their needs, model the financials and offer suggestions. Some key topics to discuss include cost, budget, timeline and the potential for realising cost savings or other benefits.

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