Do You Have the Right Insurance for Your Business? Here’s How to Understand Your Options
Opinions expressed by Entrepreneur contributors are their own.
You’ve probably had traditional business insurance. You’ve probably had traditional business insurance. But, when it comes to protecting your business against a myriad outside threats in today’s complex and changing environment, is traditional insurance sufficient?
With the tightening of the insurance market, and highly-priced premiums ,, it’s an important question. This is especially true as more businesses look for alternative risk transfer. And an increasingly trending option is captive insurance as worldwide more than 100 captives formed last year as reported by Business Insider.
Background of traditional and captive insurance
Traditional insurance has built up a portfolio of coverage offerings and options for businesses. Traditional insurance includes risk distribution, tax deductions on premiums, and many other blanket insurance coverages, such as general liability insurance or business income insurance.
Captive insurance is a wholly owned subsidiary that exists to protect your business from unique threats and provide the dynamic and unique plan your business needs. If your business is unable to obtain the insurance coverage it requires from the traditional market, captive insurance may be the right option.
For instance, business interruption insurance is a coverage that insulates your business from disasters such as floods and earthquakes. However, this coverage does not protect businesses from tornadoes or fires. To activate this insurance, you must have an event that “triggers”.
Businesses closed during the pandemic experienced financial losses. To trigger their business interruption policies, they had to be completely shut down. Captive insurance allows businesses to access their cash reserves and cover losses in the event of partial shutdowns that aren’t covered by traditional insurance policies. Captive policy language is designed to protect the business owner, unlike traditional policy language that has many exclusions.
Captive insurance doesn’t penalize other firms for bad behavior. The cost of insurance is not based on claims from similar businesses. Companies looking for lower coverage or hardening their premiums are two other reasons to consider leaving traditional insurance.
Companies looking to have more control over their insurance programs and coverages can create a customized insurance plan that is tailored to their unique risk profile.
Premiums aren’t a sunk cost with captives
High premiums with traditional insurance providers can handcuff your business to hardening monthly rates and can leave your business feeling the impact of those high expenses. Captive insurance allows your business to retain profits even if claims aren’t paid.
These retained profits are subject to deferment of taxes on losses reserves, which allows for the accumulation of larger funds for investment or for unforeseen financial impactful situations like litigation. These funds can be used to protect your business from financial losses in economic downturns and other fiscally difficult situations.
This can be a great way to help small businesses scale up as the premiums you pay with traditional providers may mean that your business can spend less money on expansion. Your business will need to expand as it grows in size and requires more coverages. Comparatively, Kiplinger pointed out that captive insurance can provide these necessary adaptive coverages as the need for them comes up along the way.
Policy differences and FAQs
If your business faces potential cyberattacks, medical malpractice suits and many other costly risks, the deductibles associated with these protections are growing with traditional providers. Premiums for cyber insurance have increased by as much as 50% and 100%.
In keeping with the previous example, flexibility in captive policy language would be a benefit. As evidenced by the civil unrest of 2020, whereby areas of the country experienced protests, riots and sit-ins that destroyed neighborhoods. If the area surrounding a business is damaged or inaccessible but not the business itself, the traditional insurance policy will not be activated, and your business could be left with no coverage.
So how much time does it take to create a new policy? Traditional insurance providers are often behind the times when it comes to protecting businesses from cyber attacks. New threats can mean that you need new policies to protect your business from them.
According to Deloitte, traditional insurance takes 12 to 18 months to create and release new insurance products. This is unacceptable considering the speed at which threats can arise and could potentially harm your business.
Additionally, when buying traditional insurance coverage, startup costs are limited to the premium. However, a captive insurance company requires capitalization and start-up costs. There are also legal fees. Because a captive insurance company can be legally formed, this is important. Captive insurance allows you to build upon your risk mitigation strategies and accumulate funds for potential losses.
Although forming a captive can seem daunting for non-insurance professionals, there are many captive management firms that can act as an insurance front office for business owners. These companies help companies create and manage their own captives.
Captive Insurance can be an option for small and large businesses. Captive insurance is best for businesses with high-risk, complex, or expensive risks. It also benefits those who have more cash flow, liquidity, and profitability. Both traditional insurance and captive insurance have their own unique features, so one is not necessarily better than the other. No matter what type of insurance you choose, protecting your company with the right plan is essential.
Frederick has been an active trader for over since 1991. After successfully navigating the market for so long, he’s finally bringing his wisdom to the masses.