Over the last month, I have held discussions with an organization that was researching whether or not to start a captive insurer. One of the early questions I got was, “Why wouldn’t we want to create our own insurance company?”
The question caused me to pause because, more often than not, it’s outside consultants instead of a real and identified need that seem to be pushing management to form a captive insurance company. Therefore, I thought an article on five reasons not to form a captive insurer would be beneficial to individuals looking for ways to question the given notion that a captive always makes sense.
The five reasons I cite below are based on my opinion, and I am sure there is a much larger list than mine for why a given company would not want to choose to form or join a captive. However, from my perspective, these are the five that I consider to be the most critical to the long-term success of this venture. Readers may disagree, and we are always open to publishing critiques and/or rebuttals to articles we have printed. If so, email me your thoughts.
I have deliberately listed these reasons in order of importance from highest to lowest. If you can’t positively answer the first two questions, then there is no need to proceed further down the list.
1. Lack of Insurance Expertise
Within this reason, I include two items: lack of current insurance expertise among the owners and, if this is true, unwillingness on behalf of these owners to undertake the education necessary to learn the business. For example, I recently sat in on a presentation concerning loss reserve development. The individuals involved in the presentation were the company’s internal actuary and the external opining actuary.