In part three of our captives blog series, we address some common misconceptions as shared by our clients.
Like any person in your shoes, you’ve probably had (or heard) the following thoughts:
- “You’ll pay more because of other people’s claims…”
- “Your claim experience isn’t good enough…”
- “You don’t pay enough in premiums…”
- “You’re too big for a captive…”
Addressing These Misconceptions
Paying for Others’ Claims
Yes, it’s true that you may be sharing risks with other businesses, depending on the type of captive you’re in, but this doesn’t necessarily mean that will cost you more.
The beauty of a captive is that you’re paired with like-minded peers who are all trying their best to minimize their own risk and work their own claims as efficiently as possible. Every business has bad claims now and then – there’s no escaping it. In a group captive, you will always help your captive peers pay claims. But they are also there to help you pay yours when you have a year with high-cost claims, and since each captive also buys reinsurance, the captive and its members are protected from those rare, high-cost claims.
One bad year of claims won’t rule out captives as an option. However, a history of several high-cost claims may cause a detour. If you find yourself in this position, don’t panic. An experienced broker can work with you to improve your company’s safety procedures and claim management, and help you get where you need to be in order to join a captive.
We hear this from new clients all the time. Somewhere down the line, someone tried to talk them out of captives because their business was “too small” or because they didn’t spend enough on premiums. The reality is that captive groups come in all sizes and span across different industries, so your insurance spend really shouldn’t be the deciding factor.
Are Captives Really Worth It?
Two of the main concerns about captives are that they’re an enormous time commitment and require ownership to be very involved.
The truth is, this alternative risk strategy may or may not be right for your organization, based on many factors. The reality is that if you choose this route, you may have to go to board meetings. It’s possible that offshore travel may be required because some captives are domiciled overseas. Also, the attention that you give your claims is probably going to be greater when it’s your money at stake versus when it’s the insurance company’s money paying out claims.
There’s definitely a commitment of time, energy and resources. That being said, our experience indicates that the payoff (or payback to the owners of the captive) is significant and considerably worth the effort.
Or, to view any entry from this six-part series, check out the links below.
- Part 1: Breaking Down the Basics
- Part 2: Learn More About Group Captives
- Part 3: Addressing Common Misconceptions About Captives
- Part 4: Captives as an Employee Benefits Solution
- Part 5: Is a Captive Right For My Business?
- Part 6: Preparing to Join a Captive
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.