If you'd like to learn more, we'll be holding a webinar on June 15th, at 11AM, titled "An Introduction to Captive Insurance." You can sign up at this link.
We formed and operate the first series LLC in Montana (named Aegis) for captive insurers. Several other firms provide key services such as accounting, audit and actuarial work. Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company.
One of the most common questions we’re asked is, “Should my company form a captive insurance company?” It’s not as easy to answer as you might think. While some would respond “yes” simply to gain a client, the answer is actually more nuanced. Forming and running a captive is unlike any business. Not only will you have to hire a group of professionals such as a captive manager, actuaries, and CPAs, but you’ll also have to become familiar with concepts such as “duration matching” and “liquidity management.” It’s not an undertaking for everybody. And it helps if one of four fact patterns is driving the parent company’s decision making process, starting with the complete absence of any insurance coverage for a particular risk.
In fact, this fact pattern led to the formation of the earliest captives when two companies that owned property near a river couldn’t find any flood insurance. Recent flooding made it unprofitable for commercial insurers to sell this policy, forcing the Weber Paper Company and Consumers’ Oil Company to form their own insurers. Weber formed a captive with other companies, while Consumers’ Oil formed a “single parent captive” – a captive that only insures the risk of one company. The IRS challenged both transactions, arguing neither was an insurance company. The Service won their case against Consumers’ Oil, but lost their challenge against Weber. The outcomes aren’t as important as the fact that market failure, here the complete absence of any flood policies, forced businesses to find an alternate solution.
The absence of insurance is hardly a one-off event. For example, the entire U.S. business market experienced an insurance shortage in the 1980s – a situation some refer to as the “commercial liability crisis.” The situation was so dire that Time Magazine devoted an entire issue to the topic: they published it on March 24, 1986 and titled it, “Sorry America, Your Insurance Has Been Canceled.” Academics and industry experts disagree on causation, but as with the case outcomes above, that’s not material. The point is that a service many expected to be routinely available wasn’t.
This situation repeated itself in the late 1990s, when Texas experienced a mold epidemic. Due to a very humid environment, Texans use a large amount of air conditioning, which, in addition to cooling a building also de-humidifies it. The water removed from the air has to go somewhere. Unfortunately, at least some moisture winds up being trapped in the duct work. The combination of excessive moisture and Texas heat led to mold colonies growing in a large number of buildings. While some homeowners successfully sued their insurers to pay for mold remediation, the situation became too costly for some insurers, who eventually stopped writing the policy altogether.
So, when looking at your insurance coverages, ask yourself, “have I been unable to locate a key coverage? Maybe you derive a significant percentage of your revenue from a key customer. Or, perhaps your business is in California where it’s impossible to obtain hourly wage violation insurance. Please call us at 832.330.4101 for a free review of your current policies to determine if certain coverages are unavailable in the third-party market making a captive a viable possibility.