Who should form a captive insurance company?
By F Hale Stewart, JD, LLM, CAM, CWM, CTEP
The Law Office of Hale Stewart
Now that we’ve looked at 10 questions for prospective captive owners, let’s look at the question of who should form a captive.
First, let’s look at annual gross revenue requirements. I joke that a company that has at least $3 million to $5 million in gross revenue has to tell me why they don’t have a captive insurance program. At that size, a company almost always has sufficient risk in sufficient quantities to make a captive a viable option.
And, considering the ancillary benefits (such as the creation of a financial intermediary as part of your corporate group, asset protection and better risk management), a captive insurance company becomes a no brainer.
For companies in the $1 million to $3 million range, I use a sliding scale. As gross revenue approaches $1 million, the company needs to have more inherent risk for a captive to be viable.
Let me use two examples: both companies have $ 1 million in gross revenue, but the first owns a series of convenience stores in a holding company while the second is a doctor. At $1 million, the convenience store is probably getting sufficient coverage from his standard insurance policies; there probably isn’t enough specialty risk to underwrite.
However, the doctor is in an inherently risky line of business and probably has sufficient risk to underwrite. For companies that have less than $1 million in gross revenue a captive probably won’t make economic sense.
In addition, there are certain lines of business that, because of their inherently risky nature, are naturally more likely to benefit from a captive insurance program. Medical professionals top the list for obvious reasons. But other service professionals – engineers, accountants and lawyers – are also great candidates for a captive. Construction companies are also risk magnets, as are transportation companies, manufacturers, commercial real estate owners/developers and anyone in the oil and gas business.
While this list is certainly not exclusive, it does give you a flavor for companies that should be looking at a captive program.