The Importance of Captive Insurance

Captive insurance is not a new concept. It has been around since the 1950s. It became a go-to alternative to standard insurance in the 1970s during a particularly bad insurance crisis. Today, there are nearly 5000 companies, CaptiveResources being one, which help consult on the industry. They also assist companies in starting their own programs.

The decades have seen stability for captive insurance services. However, things do change over time. With a new year upon us, there are things to consider when looking to this market.

First, the captive insurance industry continues to grow. This is not only for health insurance. Today, there are captive programs for insurance in life, property damage, and even crime. With the ever-changing world of public insurance companies, organizations have moved toward the captive concept.

Second, the amount of capital that constitutes a captive has shifted. This is particularly true for micro captives. These programs are for small to mid-sized businesses without large amounts of capital normally required. Previously, a micro captive needed premium writeups equal to $1.2 million. In 2017, the IRS upped this amount to $2.2 million.

Third, well-established insurance companies are expanding into the captive market. Recently, American International Group (AIG) acquired captive company Validus Holdings to make its incursion. Other companies are also starting to see the larger benefits of multi-faceted investment.

One of the biggest challenges is making captive insurance work in a low-interest rate environment. The Federal Reserve Board has made incremental, some say glacial, moves to raise the base interest rate. This, despite a robust economy. Because they err on the side of caution, dividends remain low for investors of captive programs.

The goal of many captive boards is to determine how to increase dividends and still provide quality policies and payout on premiums. Over the last few years, organizations have reviewed how much of their investment income is used for administrative costs. They’ve also looked at driving up income while minimizing policy increases.

What does all this mean for captives this year? Be prepared. While a half-century of stability is impressive in any business model, things can shift quickly. So, speak with captive insurance organizations when you can. They can review your programs to determine what needs to change for maximum satisfaction.