Believe it or not, this month's column is not about your spouse restricting your play time, or about how much time you put in on the job, but about insurance. Many of you think today's insurance markets have you held captive - which is probably close to the truth. But we're here to see if we can make you a more profitable "captive" by changing your insurance equation around.
The amount you spend on insurance is probably the second biggest expense you incur, other than payroll. Over the past 10 years, it seems dealing with insurance matters takes more and more time, not to mention dollars, with no relief in sight. The cost bounces all over the place, you can't get an answer about what's happening in your markets, carriers are jumping ship. When you add it all up (health, workman's comp and property and casualty), it is completely out of hand.
To make matters worse (if that's possible), consider how much insurance companies just "love" to deal with construction firms. Let's face it, they don't. Your business is complicated and susceptible to large claims. It's no cup of tea for an underwriter, resulting in unstable and expensive insurance markets for contractors.
When you get down to it, however, insurance is a pretty simple business if you can control your risk. The underwriter takes your money based on his assessment of your potential losses, then makes adjustments as actual losses take place. Show the underwriter you have the ability to beat the odds and he will charge you less. Cost him money and you pay more. Pretty simple - all you have to do is control your business.
But as we all know, the contracting business is one of the toughest to control. And when you combine poor performers with the "best in class", the rates paid by the better performers are higher than they should be.
To counteract current insurance forces, business owners are taking steps to get control of insurance costs by forming "captives". You have all heard the term, along with the positive and negative stories that go with it. Yet, set up and controlled properly, they do work and offer not only lower insurance costs but tax advantages, as well. The savings can be upward to 25% of current quotes, which is nothing to sneeze at in today's insurance market.
What is a captive?
Since I know just enough about captives to be dangerous, I asked Bob Andersen, Andersen Insurance Consulting, (312) 663-9252 or firstname.lastname@example.org, to help me with this column. Bob has extensive experience with captives (over 15 years) and has an excellent knowledge of the insurance markets.
My first question to Bob was "what is a captive?" He provided this explanation: "A captive is an insurance company designed to provide insurance for the specific needs of the owners (those accepted into the group). A variety of solutions are available, depending on the data obtained and long-term objectives of the group. This company buys for a target group and not the entire industry. Specific acceptance guidelines and goals govern the captive."
A captive is created to stabilize or reduce insurance cost; establish an above-average claim experience; recapture investment income; support risk management; provide access to innovative deals; warehouse data; and produce a profit.
"Captives only admit acceptable players with both good risk profiles and proper claim controls, allowing the group to present a ‘best in class' claim history to underwriters resulting in lower premiums," Bob continued. "In addition, because of lower overhead costs, and control over claims and claim settlements, the total cost of the ‘insurance' should be within or less then the underwriters' original estimate."
Bob also pointed out that captives offer tax advantages since they are normally established offshore.