Time for a Captive Insurance Company?
I have always been lead to believe that establishing a Captive Insurance Company was only for large companies with a lot of capital and a hard to insure loss exposure. While this advantage for large companies has not changed, financial institutions of moderate size should now consider this risk financing tool. Let’s look at some arguments for banks considering this action.
A Captive Insurance Company is an insurance company you own to insure whatever you want to insure. Of course, only properly underwritten exposures should be considered. Exposures such as current policy deductibles and/or exclusions, coverages that you don’t currently buy, and coverages you can’t buy in the traditional insurance market are good examples. Premiums paid to your own insurance company are actuarially determined and paid as an expense with “pre-tax” dollars. Income earned on the premiums are taxed as ordinary income. However, with the 831b tax election, underwriting profits accrue without being taxed until a distribution is declared. The financials of your captive insurance company may be considered a part of the bank’s financials, and these accruals are shown as assets.
What does it cost to setup a Captive Insurance Company?
There are numerous firms now providing this service (at present, Bahr Consultants does not offer this service) for financial institutions. The “setup” usually costs approximately $75,000, with annual expenses of approximately $60,000 to maintain the Captive. As you can imagine, in order to setup this operation, you will need a firm with experience in forming such a task. Do not try this on your own!
What can you insure?
Although the easy answer is “anything you want to,” all exposures placed in the Captive should be properly underwritten. For example, start out with first party (you) physical damage exposures. The reasoning here is that a catastrophic loss in the liability area could wipeout your Captive before you even begin. Property deductibles and auto physical damage are the best places to start. The deductibles for your Bond and Directors & Officers area are another possibility. Cyber physical damage (i.e. viruses, hacker damage) should seriously be considered. There are too many gaps in the cyber insurance coverage area not to include this exposure in your Captive program. Credit/Debit Card coverages are another area with insurance policy gap exposures, and, frankly, the potential loss scenarios in both the Cyber and Credit/Debit Card areas have the insurance industry scrambling. Having your own coverage for these exposures until the “dust settles” in the insurance industry just makes good risk management sense.
Considering establishing a Captive makes good sense, not only from a risk management prospective, but from a financial one as well. Should you want to consider establishing a Captive, please contact me, and I will be happy to direct you to a specialist who can assist you.