As an owner of a construction contracting firm, you may have heard how some in the industry are forming “Captive Insurance Companies” to combat the increasingly high cost of insurance premiums. Is this an option for your business?
Understanding the Basics
A captive insurance company is a legally licensed, limited-purpose property and casualty insurance company formed specifically to insure the risks of its owners. Owning a captive gives the parent company more direct control over its insurance so it can tailor coverage to meet its particular needs. As a legitimate insurance company, a captive also can directly access major reinsurance providers who underwrite the captive’s risk, thus avoiding a commercial carrier’s commission.
Contractors can form captives to provide coverage against various risks including general and umbrella liability, auto insurance, employee benefits, and workers’ compensation, among many others. Some contractors use a captive to cover risks their commercial policies exclude or to add coverage beyond their policies’ maximum limits. Another approach is to purchase high-deductible, lower-cost coverage from a commercial carrier and then use the captive to provide “first dollar” coverage for losses less than the deductible.
Addressing the Complications
Unlike simple self-insurance, a captive is managed, operated, and regulated as a legitimate insurance company. This means it must meet the minimum capitalization and reserve requirements of the jurisdiction in which it is domiciled, and it must spread its risk exposure adequately across various risk categories.
Although very large companies may be able to meet these requirements and form a pure or “single-parent” captive, many midsize contractors find it more practical to be part of an association or group captive, in which multiple companies pool their resources to share risks. Even then, forming or joining a group captive requires a sizable upfront commitment of both time and financial resources, in addition to premiums paid.
A captive insurance company should be regarded as a long-term risk management strategy, not just a cost-saving measure. And while a captive can also offer tax advantages in certain cases, the decision to form a captive should never be made on the basis of tax considerations alone.
If your firm is paying hundreds of thousands of dollars in annual premiums, you may be a candidate for forming a captive insurance company. This is not a do-it-yourself undertaking. Seek advice from your insurance professional, legal counsel, and financial advisor who can inform you of the risks, the opportunities, and guide you through the process.
A captive insurance company is just one of many options for combating rising costs in the construction industry. Dembo Jones’ industry professionals can evaluate your business and work with you to plan a comprehensive risk management strategy that positions your firm for success no matter where the cost of premiums, materials, and wages are headed. Contact us today.