Subsidizing:
Traditional insurance is based on the concept of “good” risk subsidizing “bad” risk. If the profits generated by the “good” risk are greater than the losses sustained by the “bad” risk, insurance companies make money; if not, then everyone’s rates are affected. If you are one of the insurance company’s profitable clients, then you are subsidizing other companies.
What is a Captive?
At ARGES we define captives as independently owned and operated insurance companies that provide insurance to, and are controlled by, their owners. A captive insurance company analyzes and insurers the specific risk of its owners, typically reducing operating costs, and returns underwriting profits and investment income to them in the form of dividends.
Why Consider a Captive?
The insurance marketplace has historically endured “hard and soft” market cycles where premiums go up and down with little relation to your actual loss experience. By becoming an owner of an insurance company, these swings can be eliminated, making insurance costs not only more predictable but actually profitable. This is achieved through unbundled services resulting in lower fixed costs and the ability to retain investment income.
Benefits of a Captive:
Lower Costs- The price of insurance coverage purchased in the conventional market can oftentimes include mark-ups to pay for insurer’s acquisition costs, marketing expenses, administration and overhead. Such pricing is specifically designed to deliver profit to the insurer’s bottom line. In a captive, the goal is to minimize those costs and enhance your bottom line
Better services and better management- Since members are allowed greater participation in managing their losses; they receive improved loss control and awareness of the factors that commonly give rise to losses. Members are able to reduce and often prevent losses in the future.
Enhanced profit potential- As a member of a captive, you are rewarded for risk control by receiving dividends that are directly related to your loss performance, while investment income accumulates to your benefit. That’s more money in your pocket to invest in whatever way your business needs it most.
Long-term control of your insurance destiny- Captives afford their members the ability to customize insurance programs that are tailored to their specific needs. Also, as a captive grows so does its risk tolerance and ability to negotiate favorably with reinsures.
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