Frequently Asked Questions About Captive Insurers

Captives can be a great way to tailor your insurance coverage to your business without overpaying, but a lot of companies are intimidated by the prospect of setting up a sister company they own. It’s easy to understand why. Launching a new business, even one that only exists to service another company, is a big endeavor. It’s easier with partners, and that’s where a captive insurance broker comes in. Captive brokers can help match you with other companies that have similar needs, so you can share administrative duties and starting expenses, making it easier to own your own insurer. Here are some common questions entrepreneurs ask before launching into this field.

How Do Captives Save a Company Money?

There are two ways captive insurers help lower your bottom line. First, they can be run at cost. As long as the policy covers the basic expenses of operating the business and the cash reserves remain adequate for an insurer to maintain stability, you don’t actually need your insurer to make money. If it does, the profits all come back to the companies that own it anyway, so you recover the excess. The second way they save money is by providing specialized coverage that gives you what you need without any chance of buying insurance coverage you won’t use. Often, boilerplate add-ons include a lot of coverage items you won’t need along with the ones you do. When you’re tailoring your policy, you can cut those areas of coverage and focus on protecting yourself better in the places where it counts.

What’s the Difference Between Captive Insurers and Self-Insurance?

This is a good question, and those who don’t have a lot of experience with insurance are often confused about the difference because they seem like the same thing. In fact, having a separate and independent company is very different from holding the cash reserves you need to cover your own risks, both legally and financially. Captives, as separate companies, can not have their reserves appropriated for other purposes, and that can happen to an in-house cash reserve. You also can’t share costs by working with partner businesses to create an insurer that serves all your needs if you are your insurer.

Can Captives Cover Workers Compensation?

This is a sticky question, because it depends a lot on the state you are in. Some states have a single administrator for workers compensation plans, and they need to be bought separately from other policies. In other states, there is a process for being recognized as a policy provider. Since the process differs in each location, it might not be cost-effective to have a captive insurer provide this service. You’ll want to talk to an experienced broker who knows that you can do in your state to learn more.