How Does Captive Insurance Lead to Cost Savings?

In today’s competitive business environment, cutting your operating costs can often be the key to boosting profits and performance. It can both free up resources to go after more market share and also provide increased returns without the resource investment needed to chase a bigger share of the market. Depending on your needs at the moment, either result can be beneficial to managers, partners, and business owners.

The big question when considering any option is how it saves money, as well as whether there’s a chance the results will not be what is expected. When it comes to investing in a captive insurance group, understanding why it helps you lower your insurance costs is often the first step toward convincing your management team that it’s a good step for the company.

Group Ownership and Shared Risk

Self-insurance can be risky for companies, which is why it is often an option that only the largest businesses consider. On the other hand, shared ownership of a company that’s sole purpose is to serve its owners means spreading the risk among more participants. A captive insurer has more resources than a single parent company can provide, making it more stable. Providing similar policies to each of the parents allows them to share the benefits, and if any returns are generated because of low-claim years and high cash reserves, all the parents can enjoy the dividend that comes back, lowering their net costs even more. At the same time, a group captive agreement allows all parent companies to make sure they are getting the coverage they need out of the new business.

Reduced Administrative Costs

Running an insurer takes working capital, which is not a huge issue if you’re paying for policies because the cost of running the company should be figured into the policy costs. Sharing those costs with other parent companies means your policy has less of those costs incorporated into it, which in turn provides you with a lower premium and better savings than you could expect on your own. Even companies that find they have the resources to run their own captive insurers often see these savings and choose the group ownership path because of their long-term savings appeal.

What Does Your Business Need?

The first step to figuring out how much you can save by joining a captive insurance ownership pool is figuring out exactly which policies you want your new company to cover, as well as whether you still want certain policies covered by an outside insurer. These decisions make it easier for a captive broker and management company to find you the partners that can help you save on insurance.