BusinessReport.com

Do the insurance premiums your business pays keep going up? Maybe you should fire your insurance company and start your own. Actually, it’s not quite that simple, but it’s doable, at least for some companies.

A captive insurance company is one established by a separate company or association to cover the parent company’s risks. Captives don’t write any outside business; basically, they provide formalized self-insurance.

Captives can be found in about 30 other states, but a Louisiana company that wants to start one has to locate it someplace else. Commissioner of Insurance Jim Donelon plans to introduce legislation at the next session that would allow Louisiana to get in on the trend.

Vermont was the first state to pass legislation allowing the formation of captive insurance companies. The state had one captive in 1981. Now it’s the third-leading captive domicile in the world, behind Bermuda and the Cayman Islands, according to the Insurance Information Institute’s Insurance Fact Book 2007. The state has 560 active companies, and 808 have been licensed over the life of the program, according to Leonard Crouse, deputy commissioner of Vermont’s Captive Insurance Division.

Crouse says the legislation was inspired by the skyrocketing cost of liability insurance, which was getting so bad that towns were closing their public swimming pools because they couldn’t afford to protect themselves against lawsuits, he says. Clearly, more alternatives were needed. With a captive insurance company, a business can set its own payments and decide when to pay them. No need to worry about volatile rates, inconvenient payment schedules or coverage-gap surprises.

“When done correctly, this does work for certain people,” he says.

Captives have a few advantages over traditional self-insurance, experts say. For example, a business can buy its own re-insurance through the captive. You can self-insure, say, your first million dollars of risk, including several different types of coverage if necessary, then go out and buy re-insurance to cover the next million. Payments to your captive are insurance premiums under IRS rules and generally tax deductible. And banks generally recognize captives as legitimate insurance companies.

Captives are tightly regulated. In Vermont, they’re subjected to yearly audits and actuarial certification every three to five years. Crouse says there are 28 people in Vermont’s insurance department who work exclusively with captives, and the captive business brought in more than 22 million in premium taxes last year and has created more than 400 jobs.

In Nevada, where gambling is king, they’re always looking for ways to diversify the economy, says Gary Cooper, head of Nevada’s Captive Insurance Division. As Nevada has gotten its captive program going over the past few years, captive management organizations have sprung up in the state.

Every captive domiciled in the state is required to have a yearly board of directors meeting in Nevada, which brings in tourism dollars. Cooper says Nevada’s government doesn’t have any statistics yet to show the economic impact of hosting captives, but if one state offers a helpful service not available in another, the first state will probably benefit.

Starting your own insurance company isn’t for everyone, of course. You’ll need to have a sober assessment of your own risk. If your insurance company is charging you 80 or 90 cents in premiums per dollar of coverage, but you think your loss history merits a better ratio, you might want to assume some of that risk yourself, Crouse says.

Companies that pay $1 million or more in insurance premiums tend to get the best results, Cooper says. If you own three or four restaurants, you’re probably not big enough, but if it’s a chain of 12, he says you might want to consider forming a captive.

Mike Boutwell, director of company licensing at the Louisiana Department of Insurance, says he expects Louisiana’s requirements for captives, assuming the legislation eventually passes, to be more stringent than the rules in some other states. The details haven’t been worked out yet, but Boutwell says the regulations will most likely require a captive to have between $500,000 and $1 million in capital and surplus. A traditional insurer must have at least $3 million.

Regulators will have to make sure the owners know what they’re getting into before a captive gets licensed. That’s especially true for multi-owner captives, in which five companies might put up $200,000 each. A less-sophisticated business owner might not understand that he’s now the proud co-owner of an insurance company, with all the financial responsibilities that entails.

“We have to make sure (the legislation) is written in such a way that people can take advantage of it, not get taken advantage of,” Boutwell says.

He expects the captive idea will appeal to businesses in South Louisiana who can’t find property insurance at a reasonable price, and said he’s heard some early interest from companies that manage large properties such as shopping centers.