The Captive Alternative to Claims
By Robert Warne - August 1, 2002With profits sagging and insurance premiums rising, some of the largest U.S. companies are betting that they can save money by paying directly for claims as an alternative to paying high premiums. It is not uncommon for a company to self-insure for predictable losses such as workers’ compensation, but there's now a growing trend for companies to set up captive insurance units to cover the gamut of commercial liability issues.
The typical captive unit covers losses up to a pre determine level that ranges from about $5 million to $25 million. With a captive insurer a business can save money by purchasing lower levels of insurance or policies with larger deductibles. They can also just rely on reinsurance as Walt Disney Co. does, aside from its captive Buena Vista Insurance.
A.M. Best reported that there are currently 4,500 captives in the U.S., up from 3,456 in 1996. During the first half of this year 184 captives were set up. At this pace it is expected that the number of captives established in 2002 will exceed last year’s 316.
Included in the 2002 number are companies such as U.S. Bancorp, MGM Mirage and Abbot Laboratories.
Insurers and insurance analysts are concerned with the number of businesses using a captive to avoid premium expenses. With jury awards rising and the looming likelihood of a disaster, companies are transferring risks traditionally assumed by insurers onto their own balance sheets. Captive critics view this as a roll of the dice with shareholder money.
Standard and Poor’s analyst, Don Watson told the Wall Street Journal, “Captives are a time bomb waiting to explode.”
Companies do have the advantage of choosing what liabilities they want to run through their captive.
U.S. Bancorp’s captive, Midwest Indemnity was set up to cover liability risks such as slips and falls and will also insure against property damage to its ATMs, according to the Journal. It also has protected itself from unforeseen losses with layers of reinsurance.
There are many carriers that offer services and products to companies that have or are setting up captives. Some of these companies include: Zurich North America, American International Group, AON and Kemper Insurance.
Because captive insurance is one of the most flexible risk financing options available to today’s risk managers it is has become the preferred risk-financing vehicle for large organizations.
| 
__May11th2017.gif)
.gif)