Owning and running a business is filled with many risks, both unknown and known. Wise business owners will take up different types of covers to protect themselves. These insurance covers also protect their businesses against liability and financial losses.
Companies have the opportunity to turn their expenses into potential profits. They can do this by choosing either captive insurance or self-insurance. While these two insurance types are similar, they have distinctive differences.
Read on to learn the differences.
What Is Self-Insurance?
Self-Insurance is the act of setting aside some money to cover yourself against certain risks.
A start-up business can systematically save some money to cover specific problems. These problems may include cash flow issues caused by delayed payments and losses.
The concept behind self-insurance is that extensive saving could help a business cover anything that’s covered by traditional policies.
All states have different requirements for employers who choose self-insurance. Some require the employer to have worker’s compensation insurance or run a financially stable business.
What Is Captive Insurance?
Captive insurance means that one or more clients own and control the insurance policy. The goal is for the insureds to protect themselves against a common risk.
Self-insurance and captive insurance operate under the same concept. However, captive insurance is a bit complex and expensive to maintain.
An example of captive insurance is when a group of farmers create their own captive insurance company to protect themselves from financial losses due to crop destruction. The group is supposed to pay premiums to their insurance carriers the same way it’s done in commercial insurance coverage.
How Captive Insurance Is Different From Self-Insurance
Captive insurance is not an answer to all your insurance issues. But it could be a practical option for companies looking to take more control of their losses.
In traditional insurance coverage, you pay the insurance company directly. However, in captive insurance, you can see all the distinctive components that make up its premium. You will also control the delivery of the coverage and the pricing.
For captive insurance to be an effective solution, it must allow an increase in profits rather than unwanted expenses. This is achieved by financing smaller and more significant risks alike.
Members of a captive insurance plan can also buy reinsurance. This move adds an extra layer of security to their businesses. The additional cover reinsures business losses above a specific point.
Captive insurance can cover a much larger percentage of losses than self-insurance. These losses are caused by realized business risk. However, if this risk is not realized, all the premium payments go to waste.
Which Is the Best Cover for You
Now you understand the difference between self-insurance and captive insurance. Therefore, it’s up to you to choose the best coverage depending on your business needs. Take into account all your business risks and choose the best plan.
For more insightful business advice, check out other posts on our website.