Alternative coverage options
The insurance your company is currently purchasing through the traditional market likely includes coverages such as general liability, property, workers’ compensation, product liability, directors’ and officers’ and auto. Many captive owners are perfectly comfortable with these coverages and wouldn’t consider moving them to a captive. However, there are times when the terms, conditions, or coverage levels that are available in the market do not meet a company’s needs.
This can happen for a variety of reasons. For example, there are times when a particular industry is hit with abnormally high losses which trigger market increases in premium rates. When that happens, all organizations in the industry are impacted regardless of their specific loss experience. Some companies decide that it would be more economical to have the captive underwrite this risk because the premium levels would accurately reflect the organization’s actual loss experience and risk and not that of the entire industry.
If you are looking for options for a potential captive to write, as it turns out, there are many. Once again, provided the coverage is commercially reasonable, it can be written by a captive. For example, captives will often write some form of liability coverage. Some of the most popular liability insurance carried by captives include: workers compensation insurance, general liability insurance, professional liability insurance and directors and officers liability insurance.
Other liability coverages include errors and omissions, professional liability, performance liability and product liability insurance. Captives will also frequently write coverages such as employment practices liability insurance, patent- and trademark-infringement liability insurance and environmental liability insurance.
Because an organization’s individual liability coverage needs are often unique, it’s important to carefully tailor the program. This means structuring the policy to cover the unique liability needs for the insured and then retain excess coverages appropriate to each coverage need. A five-person dental practice with a highly stable employee base may be comfortable with its captive retaining a high-level of the risk of employment practices liability. However, a 10,000 employee retail chain with high employee turnover may decide to have the captive cover the initial risk only up to a modest dollar amount and retain excess coverage for the rest.
An organization may also write highly customized policies that don’t exist in the traditional market. For example, a traditional general liability policy may be ill-suited to cover sexual misconduct losses incurred by a company that operates a chain of daycare centers. If this is a risk for the organization, a policy can be custom tailored by the captive to address it.
Likewise, a traditional business interruption policy may not adequately protect an organization for a delay in product launch. For a software developer with frequent new product offerings, a launch delay can have serious financial consequences. The company’s captive can write insurance coverage to compensate for losses associated with such delays. Business interruption can happen for a myriad of reasons as unique and complex as the organizations experiencing them. A parts manufacturer for the automobile industry could be preferred because of specialized equipment. If that equipment breaks, there may be no quick or easy fix thereby resulting in loss. A captive can write a policy that will cover losses caused by the out-of-service equipment and can even cover losses to the business resulting from losing a major customer because of the equipment breakdown.
The risk of loss of trade secrets and other confidential information is greater than it has ever been. Traditional policies may well come up short in providing an organization with the protection it needs, or the coverage offered may simply be much broader than the company requires. Either way, a carefully tailored policy written by a captive can address precisely the needs of a particular organization. Let’s say a large consulting firm frequently handles its clients’ highly confidential business documents—strategies, financial plans, competitive secrets, etc. Because of the practical advantages of current wireless communications technology, the consulting company chooses to move a lot of confidential information through wireless transmission. It wants coverage to protect it from loss caused by the interception of such transmission. Let’s say the standard policy to cover this kind of loss in the traditional market also covers a variety of other forms of loss that are not relevant to this consulting firm—or the wireless interception coverage is not extensive enough. The captive can not only write just the coverage that the firm needs, it can also make sure that coverage addresses exactly the potential losses anticipated.
Captives are increasingly finding practical application in the employee-benefit market as well. Some companies are now offering voluntary employee benefit programs through their captive insurance companies. These include supplemental health and life coverages. Why not just go direct to the traditional market for these coverages? The captive can provide benefits at a lower cost than is available in the retail market and because it has a very low overhead, it can pass the savings onto the company’s employees. Captives can also write post-retirement medical, dental, disability and life insurance policies—again saving the company and the company’s retirees money.
Practically speaking, the options are limitless. Understanding your company’s risks and defining the most appropriate coverage scenario that would address those risks in the most cost-effective way is what captives do best. Understanding those risks and then drafting and administering relevant policies covering those risks is part of effective captive management.