Captive insurance can help contractors manage risk and improve their bottom line
By Jake Dopson, assurance senior manager, CPA, CCIFP
For construction contractors, risk management is an aspect of the business that is just as critical as any in insuring the long term success of a company. Different kinds of risks are managed in different ways using different kinds of methods and tools. The most basic form of managing risk is one that we are all familiar with on either a personal or professional level; insurance. While insurance certainly serves a great purpose in the form of mitigating risk, for certain industries, participation in a captive insurance group can be more effective and less costly than the typical insurance policy.
So what is group captive insurance and what are the benefits? A group captive insurance company is formed and owned by a group of companies in similar industries. The company functions as an underwriter of business risk for its members by offering self-insurance to those members for any number of types of coverage, including workers’ compensation, automotive, and general liability. Typically, a claim limit is put into place for claims covered, after which a stop-loss insurance policy held with a third-party insurer will kick in. In most cases, group captive insurance companies are managed by a third party administrator on behalf of their members.
The most readily identifiable benefit of group captive insurance is cost savings. In a typical commercial insurance arrangement, premiums are padded to cover the insurance company’s overhead costs and profit margins. Group captive insurance companies are not trying to make a profit, and are simply trying to provide their members with low cost insurance coverage. This can be especially beneficial to companies who have either very favorable of very unfavorable loss histories. For companies with favorable loss histories, the anticipated cost of claims incurred through the group captive might be significantly less than commercial insurance premiums. On the other hand, commercial insurance premiums for companies with unfavorable loss histories may be too expensive to bear, and a group captive offers these companies an incentive to improve its financial condition by improving its loss rates going forward.
Like any business owner, a member of a group captive insurance company also earns a share of any profits earned. For members of a group captive, this means a share in investment earnings of company assets, as well as a return of premium payments in excess of claims paid. Of course, the other side to this benefit is that members also share in losses in the case of excess claims, as well as covering costs incurred to pay third party administrators and claims processors. However, these costs are generally less than what would be incurred through a traditional insurance arrangement. Not to mention the fact that bringing claims management “in-house” can eliminate the red tape and bureaucracy associated with the claims processing at commercial insurance companies.
By understanding the pros and cons of a group captive insurance company, construction contractors may find that participation makes a great deal of sense for their company. While not for everybody, group captive coverage can help a company manage and mitigate risks associated with its business and industry, while improving the financial condition of the company.
For more information on how your company can achieve better results, contact the team at Pulakos CPAs – where Performance Matters™!