Many independent insurance agents have become more acquainted with captive insurance and how it works. Even then, we’ve encountered our fair share of agents who are still hesitant to talk about captives, let alone how the underwriting process works.
At Captive Coalition, our sole purpose is to help independent insurance agents understand captives, including the underwriting process. That way, independent agents and their best clients understand how captives work and how to get into this alternate form of insurance.
In this article, you will learn about the essentials of captive underwriting. You will have a better understanding of how this process works and be able to discuss the benefits to your best clients.
What is Captive Underwriting?
Captive underwriting differs from traditional insurance underwriting, focusing on the specific risks of a business rather than the general industry criteria. This approach means the captive insurer–often a subsidiary of the insured business—looks at the company’s risks and claims history.
Critical Considerations in Captive Underwriting
When a business considers captive insurance, the underwriting process evaluates the company’s risk management practices. Here are four critical questions the captive risk committee will ask:
- Is the business’s claims history based on solid risk management practices, or was it just good luck? The committee examines whether past claims history reflects solid and proactive policies and procedures, not just a stroke of luck. This evaluation is essential in determining whether a business is ready to own its insurance company.
- Is there a commitment to continuous improvement in risk management? Beyond one-time implementations, the business must demonstrate a long-term commitment to adapting and improving risk management strategies as the risk landscape evolves.
- Does the business have a comprehensive risk management plan? A well-defined, long-term strategy is a must. The committee looks for evidence that the business will consistently manage its risks over time, ensuring the captive remains profitable.
- Can the business sustain profitability as a captive owner? The captive’s success hinges on the business’s ability to manage its risks effectively and maintain profitability.
Assessing Insurance History
The captive risk committee scrutinizes a business’s insurance history to determine whether past successes were due to effective risk management or mere chance. Key areas of focus include:
- Risk Identification: Has the business thoroughly identified its risks?
- Risk Management Plans: Are there robust plans to mitigate these risks?
- Adaptability: Does the business have processes for identifying and adjusting to new risks?
Long-Term Risk Management and Profitability
A business’s long-term success as a captive owner depends on its ability to manage risks consistently and effectively. The captive risk committee will assess whether the business owner:
- Understands their risk portfolio: A business understanding its risk is significant for long-term success in a captive.
- Stays informed on changes: Monitoring the risk landscape is essential.
- Improves risk management strategies: An ongoing commitment to refining strategies is crucial to profitability.
Preparing for the Captive Underwriting Process
Being prepared is essential if a business owner wants to transition to a captive insurer successfully. Clients should be encouraged to conduct a risk audit and examine their risks, claims history, and current risk management practices. That way, they have insight into whether they are ready to take the responsibilities of captive ownership.
Factors in the Captive Underwriting Process
When moving forward with the captive underwriting process, underwriters will scrutinize several critical aspects of the business. These factors help determine if a company is a good fit for a captive. Here are the elements they’ll focus on:
- Premiums vs. Claims: The first aspect underwriters look at is whether the business pays more premiums than the insurer pays in claims. Essentially, they’re trying to assess if the “juice is worth the squeeze.” For companies with few or no claims but high premiums, captives might offer savings.
- Risk Tolerance: A part of joining a captive is the business owner’s willingness to take on some risks. If a business owner is overly risk-averse, captives may not be the right fit. A successful captive participant needs to have a certain comfort level with assuming risk and a belief in their ability to manage risk effectively.
- Belief in Risk Management and Safety: The underwriting process also examines whether the business owner and management genuinely believe that safety training and risk management impact the outcome of claims. If they don’t see these efforts making a difference, they’re unlikely to succeed in captivity. Captive members must be willing to take accountability and be proactive about implementing safety and risk management measures. This commitment is important because poor losses within a captive impact everyone involved, not just the individual businesses.
- Handling Past Losses: When examining a business’s claim history, underwriters want detailed information about any significant losses. They will ask questions like: “What happened?” “What was learned from it?” “What changes were made in response?” These inquiries show how the business deals with adverse events. It’s not only about having losses; it’s about the response and improvements made afterward.
- Frequency of Claims: Consistent, frequent claims can signal trouble for a potential captive member. The underwriters want to understand why these losses are occurring and what steps the business is taking to address them. Frequent claims can jeopardize the success of a captive. It’s essential to have a clear strategy to mitigate these incidents.
- Documentation and Processes: Finally, underwriters will want to see concrete evidence of the business’s commitment to risk management. This includes written safety plans, a safety commitment with regular meetings, and comprehensive employee handbooks. If these documents and procedures aren’t in place, it may appear that the business has been more lucky than good when it comes to avoiding significant losses. Captive underwriters expect to see a well-documented approach to safety and risk management as a sign of the business’s readiness for captive participation.
- Ongoing Development and Adaptation: It doesn’t end once a business joins a captive. Underwriters and captive managers expect ongoing loss control efforts. This involves continuously learning from past losses and adapting strategies to prevent future occurrences. Being proactive in addressing potential risks and having a member development plan in place shows a business’s dedication to maintaining a low-risk profile.
Being familiar with these factors as an independent agent helps you better prepare your clients for the captive underwriting process. Knowing these considerations can help you assist in evaluating if a captive is a viable option for their business.
Is Your Best Client Prepared for the Captive Underwriting Process?
As you expose your clients to captive insurance, preparation will be necessary. Help them conduct thorough risk audits and ensure they have a strong and adaptable risk management strategy. That way, they can have innovative and effective insurance solutions that fit their needs. Knowing these key concepts can allow you to confidently discuss captives with your clients, leading to long-term savings and greater control over their insurance.
Up next, read our article on the pros and cons of single-parent and group captives. That way, you and your client will better understand which type of captive best fits their business and their needs.
Schedule a free consultation with Captive Coalition to talk to one of our insurance advisors.