How To Become Self-Insured l Captive Insurance l How Big Does Your Company Need To Be

Hey guys, I'm Hunter with Nelson Insurance. I'm going to get into what is captive insurance. Let's do it. Captive insurance is going to be something where it's almost like you're self insuring. You have two different options. You can straight up create your own insurance company. It's called a single parent captive and this is where you can get everything rolling on your own. You're the only one in there and you create this insurance because it's only insuring you. A group captive, which is much more popular is where you're going to join a couple other companies. They've created their own insurance company. You're going to be buying into it and you are still going to be part of this deal where it is your insurance company but you're going to have a couple others and you got to have a really low loss ratio where the board of, of other companies in there are going to let you in. So I'll just get into how it works real quick and then what it looks like in that situation. So how a captive insurance company works is it's going to be its own insurance company where it's going to go get reinsurance by somebody who's a big insurance company like cna, Chubb National, Interstate, etc, and then you're almost going to act like your own insurance company. You're going to pay in these premiums as you pay in more. You're going to get investment dollars from it. Your, your money's being invested and you're going to earn dividends from it just like a normal insurance company would. But the only difference is is that you're not going to pay for these claims on the stuff that is not coming in that reinsurance will not be coming into play on. So for example, if you, if you join a captive or you create your own captive, you might have a million dollar threshold. So you're going to pay for all claims under a million dollars. Everything's out of your pocket. So the less claims you have, the more money you're going to earn in dividends, the more money you're going to get to keep and your rates or how much you're paying into the captive is going to be much lower. If you're having a ton of claims and right now your loss ratio is poor. For example, loss ratio is going to be if you pay a million dollars a year for insurance through Progressive, for example and you turn in $2 million a year in claims, let's have 200 loss ratio. Progressive is losing twice as much money as they're making on you. So a captive would be a really poor decision for you because you don't, you're not going to have, you're, you're going to take on their risk now. Okay. And then the reinsurance is going to pick up on any claim. That's a monster. So if you're paying a million dollars a year in and you got a million dollars in your fund, well, if you go turn in a $10 million claim, the reinsurance company is going to pick up the $9 million after that. But everything in the million dollar section you earn dividends on, it's your money. You get control there. So if you're not turning a lot of claims yet, money is as good as yours. It's going to be invested for you and you get a lot more say in what's going on here. So this is what a lot of the bigger companies are doing because it's like owning a home versus renting a home. Owning a home is not a ton cheaper than renting a place. Landlord's not making that much money. So why, why go into a captive then? Well, because it's like owning a home. It's your money now. You're paying off your loan. At some point this thing's going to be paid off. You get a lot more say in what's going on. You can't, you're not going to have a landlord saying, hey, rent's going up, 500 bucks this year. Your home might go up, but that's going to be a decision usually that you're making. Yes, there's going to be your insurance and your tax for your home. But it's, again, it's all minor factors. Right. So you're putting money into this captive. That's your money. That's, that's what you have to keep. If you keep flooding this thing, you can, it's all your money that you can, you can take a little bit out and the money's accumulating for you. It's, it's being invested, it's, it's gaining interest on it. Right. So how do you, how do you get into this deal? Well, if you're paying $10,000 a year for your insurance, you're not getting anytime soon. There's a couple different captives out here for trucking where they have a minimum threshold of $250,000 a year. Again, just because you're paying, for example, 300,000, does that mean this would be a good choice for you? No, it does not. That's the Bare minimum premium that you have to be paying a year to make this make sense. So a couple reasons why this might not make sense is if you're paying 200,000 a year in premium but you're turning in $500,000 in claims, you don't have the money up front to go fund this thing and pay a million dollar claim out of pocket right at the time. So you might, you might be barely cutting those 25 or $20,000 a month insurance bill checks. But if you start paying the $20,000 a month into the captive and you have a hundred thousand dollar claim, well you're, you're on the hook for that now. So that would make sense for you. Also wouldn't make sense if you were paying 10,000 last year. Now you're paying 250. You just, you just grew. So it doesn't make sense for you, right? So you're going to have the claims and everything on those lines and the premiums that's going to come into account to make sure this, that a captive is even worth it for you. The other thing too is going to be the time factor. You can't go hop into a captive like you do with switching insurance. It's not going to be like, hey, I don't like great West, I'm going to go hop into a captive here tomorrow. Now you got to, if you're a single parent captive and you want to go set up your own insurance company where it's just you in there, you're going to be creating your own insurance company. You got to go get your insurance licenses, you got to go talk to the part of insurance, create your own company. You're going to need to see your financials. There's all sorts of work involved in this and something like that probably is going to take six to nine months. For example, a group captive might take 60 to 90 days. So it might be a lot quicker there for you in a group captive because it's just, hey, show my information, the group will let me in. Great things already established there for you and this makes sense. So when does going into captive really make sense? I know I touched on maybe when it doesn't make sense. But let's say you have a real loss ratio. Let's say you're paying a ton in insurance, you're paying millions or well over 500,000 a year and you're sick and tired of this money just going nowhere for you and you're making the insurance company all kinds of money. Now it's time to get into a captive. The one other thing I want to say there real quick too is, and this is another good fit, this would go into exactly what I was talking about. But if you're risk is really tough to insure, like you do something along the lines of hazardous material cleanup, that's just very expensive to insure because there's very few insurance companies that will insure it. So, you know, usually the sooner the better. You can get into a captive in that situation if you're something super easy to insure. Like all my drivers got years and years of experience and I'm hauling general freight or grain and it's all local and I'm paying $4,000 a truck. Yeah, it still would make sense get into a captive, but you're probably going to want to make sure that it makes a lot more sense with your financials and you're probably not going to get in there as soon as what a really tough to insure class code would be because you would be paying a lot more per truck per anything in that situation. Right. If you're, if you're tougher to insure because of the business that you, that you run. So what are the, you know, I mean, when, when does it really make sense to go into a captive? Well, as soon as you guys can do that, you would want to reach out to an agent. You'd want to find an agent that definitely knows what they're doing and has experience in this stuff. They can help you get set up in this field. They'll create your own insurance company. They'll help you out with that, with that sense. And depending on what route you go, whether it's a single parent captive or a, or a group captive, they can help you get set up there. You hop into a captive and then you are pretty much done with the marketplace insurance for probably ever. Getting out of a captive is super hard. So once you're in, you're in. And there's not a whole lot of reason to go back unless your business just starts going downward and you can't get a holding claims and things just get kind of out of hand. Then you'd want to go back to marketplace and probably not willingly. So get into a captive when you can make sure it makes sense. You get the money set aside, make sure you're paying a lot of insurance, you're a big enough business. Again, this is not for the people paying $10,000 a year. This is for the people paying 500,000 a year to $10 million a year. And you're a clean well run business. This is not again it's not a deal where hey paying insurance too expensive but I don't run my business. I don't have you're not investing your business. I don't have a safety manager. I just want to get my costs down. Captives are not for you. The risk is too great and it's not going to make sense for you. So if you guys are interested in looking into a captive or seeing what more of it is about looking at getting self insured because this is what the big guys do reach out to us. We've got a lot of resources for getting people into captives and we've, we've helped a lot of people even look at that option. So I'm with Nelson Insurance Agency. If you guys would like to know more information on a captive please feel free to email me or call me. My contact information is below. Thanks.