Guest Perspective
Risk Financing, Part 1 of 3
The primary purpose of a captive insurer is to provide coverage for the risks of its owners, ensuring that the insured parties benefit from the underwriting profits generated by the captive
Captives are being utilized by businesses all across the U. S. and worldwide for a variety of risk management reasons including strategic, financial, operational as well as a result of traditional insurance market condition instabilities.
Captive structures that a company forms commonly involve the company becoming the shareholder of its own insurance company, either directly or indirectly. This alternative risk financing structure provides succinct advantages for participating captive customers working in conjunction with their trusted agent / brokers in developing critical risk mitigation resources via the“ unbundled risk service” nature allowable in captive structures including:
• Direct customer / broker maintaining control over the actual total cost of risk.
• Direct customer / broker having access to
specialist captive reinsurance markets.
• Direct customer / broker maintaining control over company claims administrator and risk service providers.
• Direct customer / broker structuring risk mitigation innovations.
Key Elements for Consideration
Captives are often established by firms that are experiencing consistently unacceptable renewal terms from traditional insurance markets. This can often be the result of increasing claims costs in a select industry segment or line of business, or it could simply be as a result of negative market dynamics – with opportunistic traditional insurance markets.
However, any consistent year-over-year renewal pricing increases by traditional insurance markets typically are the result of a growing shortage of reinsurance capacity, based on certain industry segment restrictions or line of business performance outcomes, such as commercial automobile line of business difficulties.
Often, these are market-driven restrictions generated by consistently underperforming lines of business. There are four elements that comprise key considerations for CR / ST owners to consider when evaluating alternative risk financing / captive options including:
Strategic Elements:
• Creating a defined platform for implementation of an integrated risk mitigation strategy.
• Setting the provision for risk mitigation discipline in all crane-rigging-transport operations.
• Establishing formalized risk retention levels with customer organizations.
• Utilize“ A-Team” risk resources to support captive profitability.
Financial Elements:
• Participate in underwriting profits and investment income.
• Maintain provisions for unknown losses.
• Develop a true risk profit center
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February 2025 • www. cranehotline. com