From: IRMI/Captive Insurance Company Reports (CICR)
Reprinted with permission.
Captives and risk retention groups (RRGs) can benefit industry-affiliated groups by lowering costs and, more importantly, avoiding the impact of radical coverage and price changes from commercial insurers. Many groups with similar operations (i.e., hospitals, colleges, universities, industrial parts manufacturers, and retail stores) have recognized insurance cost as an expense they cannot influence in any way. Nothing could be further from the truth, with captives and RRGs being options with significant payback if the captive members with like operations are equally dedicated to investing in risk management.
There are several reasons to invest time and expertise in forming a captive. However, focusing on perceived or realized tax advantage should not be the primary reason for captive formation. Successful captives are formed to capitalize on consistent operational improvements that will lead to fewer claims over the long term, resulting in lower costs than can be provided by commercial insurers. The fundamental belief in the net effect of risk management best practices will allow the most significant return.
Commercial insurers realize profit in three forms: operational efficiency, underwriting profit, and investment return for funds held for future claim payments. Captive owners transfer this opportunity for profit away from the commercial insurers to their members.
