It Is Time To Make Paying For Insurance Rational

By Peter J. Strauss

Insurance exists for a clear reason: it Is designed to protect you from devastating financial losses.

Millions of people pay insurance premiums every year in exchange for a promise from their insurer: you will be “covered” when you suffer an insurable loss. In reality, when an initial claim is filed with the insurer, oftentimes it can take weeks, months or even years to pay out. And sometimes claims can be flat-out denied.

According to an article from CNN Money, on average, filing a single claim—for anything from a stolen bicycle to tornado damage—will result in your monthly premium increasing by 9%.

This begs the question: Do people even file claims anymore?

Consistently spending money on insurance premiums for claims you will likely never file is not rational; it’s the opposite. That’s the bad news. The good news is you can change things. You can shake up the whole concept by taking insurance into your own hands. You can easily avoid all the red tape and disappointment of wasting money by cutting out the middle man entirely.

Over 90 percent of Fortune 1000 companies, and many successful middle market businesses, have done so by creating captive insurance companies. Over half of all property and casualty premiums that are written today, are written through captives.

A captive insurance company is a company established with the primary objective of insuring the risks arising from the operating business of its owners. Businesses owners are generally drawn to the idea of setting up a captive because this solution to risk financing provides alternatives to excessive pricing, limited coverage options and impossible claims management.

Unlike commercial plans, a captive is tailored to fit the exact coverage needs of the insured. Through actuarial analysis and underwriting, the specific risks of a business are determined and a more accurate determination of premium dollars are calculated to cover them. If done properly, forming a captive insurance company can dramatically lower the excessive cost of paying a traditional insurance company by eliminating the cost of overhead, marketing, agent commissions and underwriting profits baked into your premiums.

The underwriting profits and gains from the invested premiums that would otherwise be held by a conventional insurer are retained by the captive. Even with conservative investment portfolios, the dollar amounts can be substantial due to the high levels of capital and surplus typically held. Pricing stability is achieved over time as a captive matures and expands its own risk retention capability. The more capital that is accumulated, the greater the captive insurer’s ability to retain risk and insulate itself from the disadvantage of the commercial insurance market.

Establishing a captive means taking ownership of your company’s risk control strategies, which will prevent the frequency and severity of loss to your business. The greater focus and incentive stems from the financial rewards that inherently come from controlling your own risks.

Captives also deliver better service to your operating company than a traditional insurance company—greater control over claims, improved claim review and quicker and more efficient claim processing. When you own your own insurance company, you control the timing of claim payments and will never be denied.

Various types of captive management firms exist to help you in this endeavor. The right firm will provide a suite of services including all aspects of forming and managing a captive insurer on an ongoing basis. This should include professionals who:

  1. Understand the insurance, tax and legal aspects of a captive.
  2. Work with regulators to insure sound practices in underwriting, claims, investments and operations.
  3. Have the ability to help with policy design and implementation, premium invoicing, financial reporting, corporate administrations, record retention and of course, claims management.

There is a substantial difference in owning your own insurance company and dealing with the commercial insurance market. To find out if a captive insurance company may be a good fit for you and your business, take the free assessment at peterjstrauss.com, or visit my firm’s website at hamiltoncaptivemanagement.com.


Peter J. Strauss is an attorney, captive manager, speaker and author of The Business Owner’s Definitive Guide to Captive Insurance Companies with ForbesBooks. Learn more at thestrausslawfirm.com.

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