Last-mile is facing its twelfth straight year of rising auto liability premiums, driven by consistent losses in the transportation sector. As last-mile businesses hunt for cost-saving measures, captives have become a popular alternative option for companies looking to cut insurance costs. When comparing traditional insurance programs with captives, you may discover unexpected advantages and disadvantages.
What are captives?
Insurance captives, or captive insurance companies, are in-house entities wholly owned by organizations or groups of affiliated businesses. Businesses establish captives to provide customized insurance coverage for their specific risks. By creating captives, businesses retain and fund their own risks instead of relying solely on traditional commercial insurance.
Captives can offer control over insurance programs, including coverage customization, premium setting, and internal claims management. They can provide potential financial advantages, such as improved cash flow and possible tax benefits. They also come in different types, including single-parent captives, group captives, and sponsored captives. If you’re in the last-mile industry, captives may appear too good to be true.
Understanding the appeal of captives for last-mile delivery companies
Captives emerge as an attractive alternative if you’re seeking greater control over your insurance program. It’s a particularly relevant option for last-mile companies because of the following benefits:
- Cost efficiency: Captives offer cost savings by eliminating certain expenses like broker commissions and reducing overhead costs associated with external insurers. Retaining underwriting profits when claims are lower than expected can also provide financial advantages.
- Tailored coverage: Captives enable last-mile businesses to customize coverage for their unique risks and needs – such as accidents during deliveries, theft or damage to goods, or property damage. This ensures alignment with the specific operational challenges and liabilities, all with enhanced control over the captives program.
- Stability: They can reduce a last-mile business’s reliance on market fluctuations and changes in traditional insurance availability and pricing. This stability is especially beneficial for the industry’s unique and challenging risks.
- Claims authority: Captives offer last-mile companies enhanced control over claims management. Internal handling of claims can allow for streamlined processes, potentially expediting claim settlements and ensuring alignment with your business's best interests.
Transportation captives considerations
While captives may seem appealing as an alternative insurance plan, it's crucial to be aware of the potential repercussions that accompany them. Here are several key factors to keep in mind when deciding what's best for your business:
- Regulatory conditions: You will have to navigate federal and state regulatory oversight when establishing and operating captives. Overlooking regulatory complexity and requirements can result in compliance issues and potential penalties.
- Operational details: There are several initiatives that are critical to establishing and managing a captive. This can include managing staffing, administrative processes, technology infrastructure, claims-handling capabilities, and governance structures. Neglecting these can result in operational inefficiencies and challenges.
- Financial requirements: Higher capital is crucial when establishing a captive to meet regulatory requirements and manage potential losses. Neglecting this can impede the captive's ability to effectively manage risks and bounce back from unforeseen events.
- Thorough risk assessment: Businesses can overlook the importance of thoroughly analyzing their risks and exposures before setting up a captive. It's important to identify and evaluate all the potential risks the captive will cover. This way, you can ensure that the captive is well-structured and has sufficient funding in place.
- Appetite: Very few captives have an appetite or tolerance for non-asset-based transportation operations. If you are a blended operation using both non-asset-based providers and assets, a captive may only be able to solve part of your exposure for you.
What’s more, the process of exiting a captives arrangement can present its own significant challenges.
Sunsetting a captives arrangement in last-mile
Exiting a traditional insurance program typically involves dealing with contractual terms and conditions. While there may be considerations such as policy cancellation procedures and any remaining obligations or liabilities, the process is generally straightforward. Leaving a captives arrangement can prove more challenging.
When you decide to exit a captive, you'll need to fulfill any outstanding financial obligations, settle claims, and manage remaining liabilities. It’s important to carefully assess and address the financial implications involved in the exit process. If your captive has ongoing claims or open policies, it's crucial to develop a plan for effectively managing the run-off of these obligations. This will involve allocating resources, setting reserves, and ensuring that claims are properly handled and settled, even after you've left.
Before exiting, your business should secure alternative insurance coverage to address ongoing risk management and insurance needs. Finding suitable coverage options and negotiating terms with external insurers can be difficult, especially considering last-mile’s unique risks.
Additionally, exiting a captive involves communication and coordination with various stakeholders, including your service providers, shareholders, regulatory authorities, and affected employees. Effective communication and coordination efforts will help manage expectations, address concerns, and ensure a smooth transition.
Careful deliberation
Selecting captives over traditional transportation insurance requires careful consideration. It’s important to seek guidance from experts in insurance and risk management who specialize in captives before making any decisions. Their expertise can assist in assessing the feasibility and potential benefits of adopting this alternative insurance strategy. The specific circumstances and risk profile of your last-mile business will provide clarity on whether it’s the right move for you.
Want to learn more about captives for last-mile delivery?
Connect with the Risk Strategies Transportation team: transportation@risk‐strategies.com.
About the author
Brian Jungeberg specializes in developing innovative risk management and insurance solutions for the transportation and logistics sector. From freight forwarders and brokers to final-mile delivery, Brian understands the unique exposures in the industry and how to mitigate risks. He has been in the insurance field for nearly 20 years and invites readers to reach out on LinkedIn with questions.
