As an insurance agent, you’re well aware of the various complexities involved in managing claims. However, the captive insurance model offers a unique approach that differs from traditional insurers.
Understanding these differences can open up new opportunities for your clients, providing them with more control, customized solutions, and a closer alignment with their business goals.
This article will walk you through how claims management under a captive insurance model stands apart, giving you the insights you need to explore this option with confidence.
Control: Who’s in the Driver’s Seat?
When guiding your clients through their insurance options, understanding who controls the policy is key. While traditional insurance works well for many businesses, some clients might benefit from a setup where they have more direct input. Let’s explore how control differs between traditional and captive insurance.
- Traditional Insurance: A third-party insurer dictates the terms. The business buying insurance has little to no say in how the policy is structured. Premiums paid are pooled with those from other policyholders. The insurer decides how to manage that pool.
- Captive Insurance: With captive insurance, a business–or a group of businesses–owns the insurance company. This ownership means the insured party has control over the insurance contract. They’re not just another policyholder; they’re part of the decision-making process. This control extends to everything from underwriting decisions to claims management.
Stability: How Predictable Are Premiums?
Premium stability is a common concern for many clients. While traditional insurance offers a broad approach to risk management, some clients might be looking for a solution where premiums are more directly tied to their specific risk profile.
Here’s how captive insurance can provide more predictability for the right clients:
- Traditional Insurance: One of the biggest frustrations with traditional insurance is the unpredictability of premiums. Because risk is pooled across many different businesses, a claim by another company can result in higher costs for your client, even when their loss history is excellent. Premiums can increase without warning and with little explanation.
- Captive Insurance: With a captive, premium stability is much more achievable. Since the business controls its risk pool, premiums are directly tied to its claims history. A company with a strong record of managing risk will see the benefits in more stable, predictable premiums. The business isn’t penalized for the claims of others, which is a common issue with traditional insurance.
Transparency: Knowing Where Your Money Goes
Transparency is something many clients value. Traditional insurance provides comprehensive coverage, but for some clients, having more insight into how their premiums are used could be beneficial.
Let’s look at how captives offer a different level of transparency that might appeal to specific clients.
- Traditional Insurance: Traditional insurance often operates with a significant lack of transparency. Clients pay premiums but have no insight into how those funds are used. The opacity can lead to mistrust and frustration.
- Captive Insurance: Transparency is a core advantage of captive insurance. Since the business owns the captive, it has full visibility into how every dollar is spent. This means they can see how their premiums are used, which helps manage costs and improve trust in the insurance process.
Risk and Reward
Every insurance decision involves balancing risk and reward. Traditional insurance offers security and simplicity, but some clients may be interested in an approach where they can also share in the financial upside.
Here’s how captives can offer that balance for the right client.
- Traditional Insurance: The insurance company assumes all the risk and takes all the profit. Businesses pay their premiums but don’t share in any of the financial upside if claims are low. This risk for a business is low, but so is the reward.
- Captive Insurance: Captives offer a different balance of risk and reward. Because the business owns the insurance company, it can decide how to allocate profits. This might mean lower costs, or it could mean reinvesting in further risk management. The business has a say in how its money is used, which can lead to significant financial benefits over time.
Getting Started: How Easy Is It?
Setting up an insurance policy needs to be as smooth as possible for your clients. Traditional insurance is straightforward and effective, but for clients who are a good fit, the additional effort of setting up a captive could pay off in the long run.
Let’s look at what’s involved in getting started with captives.
- Traditional Insurance: Setting up a traditional insurance policy is straightforward. The business pays its premiums and relies on the insurer to manage the policy. There are no setup costs but little to no room for customization.
- Captive Insurance: Setting up a captive takes more effort. These policies require an upfront investment, legal work, and time to create a policy that fits the business’s needs. While the process is more involved, the long-term benefits of a captive—such as customized coverage and financial control—often outweigh the initial hurdles.
Flexibility: Can Coverage Be Customized?
Customizing coverage to meet specific client needs can be a strong selling point. While traditional insurance provides solid, standardized options, some clients might benefit from the greater flexibility that captives can offer.
Here’s how captives allow for more customized coverage solutions.
- Traditional Insurance: Traditional insurance policies are typically a one-size-fits-all. They are designed to meet the needs of the average business, which means they might not cover specific risks businesses face.
- Captive Insurance: Captives allow for much more customization. The business can design its policy to address the exact risks it faces. This flexibility is one of the main reasons businesses move from traditional to captive insurance.
Is Your Client A Good Fit For A Captive?
When considering captive insurance for your clients, it’s important to identify the right candidates. Captives aren’t for everyone, but businesses that meet certain criteria can greatly benefit from this alternative insurance model.
Here are key factors to determine if your client is a good fit for captive insurance.
- Annual Insurance Spend: Ideal for businesses spending $250,000+ annually on workers' comp, general liability, and auto liability.
- Entrepreneurial Mindset: Best suited for businesses seeking innovative solutions and cost control.
- Frustration with Traditional Insurance: Captives attract clients who are dissatisfied with high premiums and lack of transparency in the traditional market.
- Commitment to Risk Management: Works well for businesses that prioritize safety and actively manage risks to reduce claims.
- Desire for Control and Transparency: Perfect for those wanting greater control and clear insight into how premiums are used.
- Industry Fit: Ideal for sectors with significant risks, such as transportation, manufacturing, distribution, and professional services (e.g., legal).
If you're wondering how your best clients would do with a captive insurer, take this assessment tool to get those results.
For The Right Client, Captives Can Be A Great Fit
Your clients rely on you to guide them toward the best insurance solutions for their unique needs. While traditional insurance continues to be a solid choice for many businesses, captives offer an alternative with distinct benefits for the right candidates. Greater control, premium stability, enhanced transparency, and the potential for financial rewards make captives a compelling option to consider.
Understanding the key differences between traditional and captive insurance will help you identify which clients could benefit from this model. At Captive Coalition, we support you in these conversations, offering the expertise and resources to provide informed guidance that builds trust and strengthens client relationships.