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Captive insurance programs enable businesses to reduce their insurance overspend, fully control their coverage, and turn safety initiatives into profitable returns.

Unfortunately, though, many organizations shy away from forming or joining captives because, when they start doing online research, they often run into incorrect and damaging myths about captives.

Moving forward, we’ll:

  • Identify the top five myths about captive insurance programs that are prevalent on the web
  • Debunk each myth using evidence
  • Describe the true value and possibilities of a captive insurance program.

Myth #1: You have to be a huge corporation to benefit from a captive

Why is this myth so prevalent?

When you first start researching captive insurance programs, most of the messaging on the first page of search engine results focuses on how captive programs are used by large corporations who hold multiple businesses and operate facilitates across the globe.

Why is this a myth?

It’s true that single-member captives (in which one business creates its own insurance company) are generally formed by large corporations, but that’s not the full story! Group insurance captives or “pool” captives specifically exist to bring together medium-sized businesses so they can gain the insurance negotiating power of their bigger competition.

When it comes to whether or not your business is a good candidate to join a group captive, your business’ size, headcount, or profits don’t enter into the equation at all. It’s all about the scale of your business insurance premiums.

The Bottom Line

If you pay more than $150,000 annually in premiums, you are a strong captive pool candidate. You don’t need to be a multi-national corporation or a Fortune 500 giant – just a business with a goal of doing things better.

Myth #2: Entering a group or pool captive exposes your business’ health to other people’s risks

Why is this myth so prevalent?

The idea that group insurance captives expose your money to other business’ risks is a logical fallacy. That is, it seems right on its surface when you have a cursory knowledge of the topic, but a deep dive proves it to be completely false.

When businesses hear the words “group” and “insurance” together, they incorrectly assume risk and responsibility are shared equally among the pool members for claims. They connect the dots and assume that if one pool member has a “bad year,” it damages their business allies as well.

Why is this a myth?

Pool captives are specifically structured to protect the vast majority of each member’s investment from the risks and claims of others. Over 90% of your premiums are specifically set aside for your use.

That means less than 10% of your total investment can be lost due to claims made by other members of your pool.

In fact, in Launchways’ group captive program, each member retains complete ownership of 98% of their funds. This means that with the Launchways group captive, only 2% of your investment is considered “at-risk.”

The Bottom Line

Yes, group captive membership requires the willingness to take on increased risk compared to the traditional insurance marketplace, but it’s absolutely false to say that your potential for profits is at the mercy of your pool partners.

Myth #3: When you’re in a captive, one big claim can blow up your business

Why is this myth so prevalent?

Like Myth #2, the “catastrophic claims scenario” is a logical fallacy: it sounds right, but it isn’t!  When people hear “self-insurance,” they assume that means “we’re on the hook for every dollar and cent of every potential claim.”

Unfortunately, this myth is also sometimes perpetuated by insurance providers and brokers who are hesitant to work outside the traditional marketplace. Their motivation is to protect their own interests and ease of doing work, not yours!

Why is this a myth?

One word: reinsurance. Whether you operate your own single-member captive or participate in a group or pool program, part of your investment is always in reinsurance to prevent exactly this scenario.

That reinsurance policy prevents unforeseen or much-larger-than-expected claims and issues from damaging your business’ long-term viability or standing as a strong group captive partner.

The Bottom Line

Reinsurance is a part of every captive program, and it’s there to protect you from potentially harming the health of your business.

Myth #4: We’d have to change the way we do business to form or join a captive

Why is this myth so prevalent?

The idea of creating your own insurance company sounds pretty daunting at first. Many people assume they’ll need to restructure their organization to make the captive viable or transform themselves into a more attractive group pool member.

Like so many other myths we’ve tackled, this one is at least in part in heavy circulation because many insurance package providers aren’t crazy about the idea of businesses cutting them out as middlemen.

Why is this a myth?

The whole point of a captive insurance program is that it allows your business to be itself more fully – you gain the ability to insure outside-the-box risks, gain ownership over the claims management process, and reclaim power and autonomy that traditional business insurance limits.

Captive insurance programs aren’t about changing your business, they’re about changing the circumstances under which you do business. Furthermore, in the case of group captive programs, independent managers handle pool responsibilities, meaning there’s minimal change to your day-to-day operations and responsibilities.

The Bottom Line

A captive is about supporting your business better and providing greater economy of scale. The idea that you need to significantly “whip yourself into shape” to be a captive candidate is false.

Myth #5: Captive programs used to offer great perks, but the value isn’t there anymore

Why is this myth so prevalent?

Anytime people perceive the value of a product or service has been reduced even a small fraction, there’s often an impulse to throw out the baby with the bath water.

Single-member captive programs used to offer large corporations significant benefit as tax shelters, and it is true that most of those incentives have been removed. In reactionary style, many of the big business blogs have published content claiming captives “aren’t what they used to be.”

Why is this a myth?

As we’ve established repeatedly in our myth-busting exercise, insurance captives aren’t just for the biggest companies in terms of workforce or economic power. Just because those industry leaders are upset about changing regulations, doesn’t mean you should be tricked into thinking like them.

In fact, some of those same regulatory changes that have made captives slightly less profitable for large, multinational entities have actually made it easier for medium-sized businesses to form effective pool captives. Even if captives have slightly declined in value for the biggest business, they’re still loaded with potential for mid-sized businesses.

The Bottom Line

Captive insurance programs still offer tremendous value: independence, authentic ownership of your business’ insurance and claims process, and the potential to make a dividend instead of turning overspend into loss are just three examples of why they’re still relevant and extremely useful. Don’t be scared off just because they’re not the big-money tax shelter they used to be.

Key Takeaways:

As we’ve seen, captive business insurance programs (both single-member and group or pool) allow organizations to navigate the insurance market in a more personalized, powerful manner.

Even though most entities aren’t big enough to pull off a single-member captive, medium-sized businesses are increasingly forming alliances that provide big value and the potential for profit.

There are plenty of myths out there about captives, most of them designed to make the programs seem scary and risky, but it’s important to remember:

  • You don’t need to be a gigantic corporation to qualify for a group or pool captive – you just need to pay at least $150,000 in annual premiums
  • Within a group insurance captive, over 90% of your investment is protected and sequestered for your use only
  • Reinsurance is built into captive programs to prevent catastrophic claims events
  • Captives should be about enabling you to do better, not forcing you to jump through hoops
  • Even if they’re not spectacular tax shelters anymore, there’s still immense value in the independence and negotiating power captives create
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