Retention levels, aggregate levels key
Captive insurance bring risk, but there is limit
Captive insurance agencies require the insured to take on more claims risk, but that risk is not unlimited. Even with a captive, you don't risk paying entirely out of pocket for a major claim or repeated claims in one year, says Christopher M. Keith, a producer with The Graham Co. in Philadelphia.
The owner of the captive puts a re-insurance carrier on top of it to minimize exposure, and it sets a limit on the retentions it will pay per year, Keith explains. Retention levels can be set depending on your appetite for risk, but it is typical for a captive to set retention levels at about $300,000 per claim, he says. So if a claim is worth $500,000, the captive would pay $300,000, and the re-insurer would pay the remaining $200,000.
A captive also puts a cap on aggregate losses. An example would be a cap set so that if there are five $250,000 losses in the same year, the re-insurer attaches and starts paying first dollar on subsequent claims.
"This is a plan that is appealing to people that have an appetite for risk, have really well-run organizations, and have fairly robust safety and loss control prevention claims procedures in place," Keith says. "They have their arms around their claims situations or at least have partnered with a broker that does that for them. Their skin is squarely in the game."
The potential savings can be substantial. When dealing with a traditional insurer, 50 cents of every dollar you spend on insurance is set aside to pay losses, Keith explains. In a year where you paid out only 20 cents per insurance dollar in claims, the insurer keeps the rest as profit.
"Our feeling is that for well-run organizations, you should keep that 30 cents," Keith says. "You're going to have to put some risk up to do that, but that's why it is right for mature organizations. You wouldn't want to do this with an organization that has been incurring a million dollars-plus a year in losses. It would not be financially viable for them."
Captive insurance agencies require the insured to take on more claims risk, but that risk is not unlimited. Even with a captive, you don't risk paying entirely out of pocket for a major claim or repeated claims in one year, says Christopher M. Keith, a producer with The Graham Co. in Philadelphia.You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
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