Is your insurance plan fitting like an ill-cut suit? Maybe it’s time for bespoke insurance- a captive vehicle.

Your insurance plan just might be fitting like a poorly made outfit- the general idea is met but it just doesn’t hang quite right, but you’re uncertain if you can afford a custom tailor.  Maybe it’s time to realize having a custom insurance plan is its own benefit.

The business effects of the pandemic have brought into the bright light that traditional insurance policies simply are not all risk safety nets that businesses think they are, that unmet expectations known as exclusions and no direct physical loss coverage triggers left large holes in businesses’ risk management plans.  Small and medium size enterprises experienced the greatest coverage shocks in terms of coverage gaps- no policy coverage for business interruption due to pandemic-related shutdowns.

This brief discussion of business insurance is not focused on the whys and wherefores of BI coverage gaps, its purpose is to suggest there are options for businesses and groups of businesses in terms of how insurance coverage can be had – captive insurance plans.

Traditional insurance policies are in great part core policies with some customized frills- liability and property coverage somewhat adapted to a respective business’s needs but in general an ‘off the rack’ insurance suit.  That’s OK, but there are risks insurance companies do not understand as well as you do, there are risks insurers do understand too well and are refused coverage, there are carriers’ administrative costs to supporting creation and maintenance of policies and underwriting, there is little control an insured has of claim adjudication with a carrier’s policy, there is surrender of the time value of premium dollars for the insured, in general insurance contracts of adhesion and time-developed policy complexity tilted to the carriers that perhaps now makes captive insurance a good option.

Until now captive insurance has been a lesser-known concept, kept by a limited number of savvy companies who realize risk self-retention is empowering from many perspectives but also recognize is legally, administratively and economically challenging.  Make no mistake- establishing and managing risk through a captive- essentially an insurance company you create- is a daunting task.  Every aspect of risk management that your current carrier performs for you and to provide you the policy you have are tasks your prospective captive would need to manage.  Capital acquisition. Administration. Tax management. Underwriting. Claims. Did I say tax management?

However- a captive gives the owner flexibility in what risks are covered, how claims are handled, how premiums are managed (including potential tax-advantaged placement and funds use), how promptly claims are settled, essentially getting a bespoke business suit instead of the off the rack option.  Like engaging a seamstress starting from scratch to create your outfit, there are upfront planning and financial barriers to creating a captive.  Typical costs of creating a captive plan approximate a few hundred thousand dollars by most experts’ advice- before reserves are addressed.  Most businesses’ leadership do not include managing insurance as a highest and best use of the C Suite’s time, so hiring a captive manager is wise.  Similar thought for claims, underwriting, finance, and so on.  If you are booking annual insurance premiums in six figures and have coverage gaps in your risk management (known or – gulp- unknown), investigating becoming your own insurer is a prudent step.  Even if your premium amounts are not six figures plus but you are part of a business cohort that has experienced inadequate coverage, perhaps pooling your risk management efforts with peer companies is an option to consider.

Step back in time to 2019 or earlier, where you may have been prudent in having created a captive vehicle with the purpose of mitigating effects from a systemic risk like a pandemic, and the vehicle focused on business interruption coverage.  Not even full indemnity coverage (that challenge is for another day’s discussion), but a parametric coverage or limited indemnity plan.  Your captive manager helped partner up with peer businesses, created the captive, you financed it (ouch), partnered with a reinsurance company (you can do that if you are an insurer!), connected with a good third-party administrator in case of claims, ensured your tax advisor was on board with the plan, and when the pandemic shutdowns hit the index for the BI parametric trigger was met and claim payment made. The plan was not inexpensive, the rei backing was a little dear, financially, but you had a modicum of control on a risk that all SME’s encountered, most with no previous options for financial back up.  Yes, the scenario has more detail to encounter than I noted but absent an alternative means of risk financing that a captive is you may still be wrangling PPP loan paperwork and taking your agent or broker to task for coverage that does not exist.  The same idea can apply for other risks you know well but the insurance industry either does not or does with significant financial cost passed to you.

Is it time to visit the concept of bespoke insurance?  Sure, get that well-fitted business outfit and hope you never need it.  But think- if you do need to engage a custom insurance plan it will look good on your business.