Many construction company owners have heard the term “captive insurance” but there are a lot of misconceptions about captives. Various myths have cropped up via industry scuttlebutt about captive insurance benefits & drawbacks. In this blog post, we will dispel some of these myths and provide a clearer understanding of captive insurance and its uses.
Myth #1: Captive insurance is only for large companies.
Many people believe that captive insurance is only for large companies with deep pockets, but this is not true. While captive insurance is often used by large companies as a risk management tool, it can also be a useful option for small and medium-sized businesses. In fact, smaller businesses may find a captive one of the most valuable investments they can make.
Myth #2: Captives are only used to insure against rare or unusual risks.
Captives are not just used to insure against rare or unusual risks. They can be used to insure against a wide range of risks, including common risks such as workers comp, general liability, and auto. In addition, more coverages can be tailored to the specific needs of a captive owner(s). Many captives are starting to help underwrite warranties of certain types of construction work, health benefit programs, and much more.
Myth #3: Captive insurance costs more than regular insurance.
Premiums that you pay to your captive insurance company will be based on the unique needs of your company and the captive isn’t trying to make a profit from you since you’re already an owner. This typically results in annual premium savings. Premiums are also more stable because they aren’t subject to the fluctuations of the larger commercial market. Over the long term, we think it’s safe to say that you can definitely expect a captive to be less expensive.
Myth #4: Captives are only used by tax cheats.
Captives can be located in offshore tax havens and many are, but they can also be located in other jurisdictions, including the United States. In fact, the state of Vermont is the third-largest captive domicile in the world. The location of a captive depends on the specific needs and goals of the company using it. Some companies may choose to locate their captive in offshore tax havens to take advantage of favorable local tax laws, however in recent years many tax treaties have been put in place between countries to address the repatriation of profits. Whether your captive is located in the US or another country, the main benefits aren’t usually based around taxes.
Myth #5: Captive insurance is not regulated.
Captive insurance is regulated by the insurance authorities in the jurisdiction where it is located. These authorities ensure that captives operate in a safe and sound manner and meet certain financial and operational standards. This regulation provides protection for the companies that use captives and for the policyholders who are insured by the captive.
Bonus Myth: My company typically has a few claims each year so a captive isn’t an option for me.
Spoiler alert: Whether your company buys insurance from a captive or a commercial carrier, claims are going to happen. It’s often assumed that the only companies that use captives are the ones with impeccable safety records. This is untrue. What’s more important than a perfect record, is the willingness to create a company culture that minimizes claims. If you can demonstrate that, you’re likely to be a candidate for a captive regardless of your claims history.
I hope that after reading this you feel more comfortable with captive insurance in the construction sector. Many companies within the building trades should examine their assumptions regarding insurance and investigate if forming or joining a captive is right for them.
If you’d like to find out more about how a captive could help your company, let's setup a time to chat.