The trucking industry faces countless risks and challenges, from accidents and cargo damage to rising insurance premiums. As traditional insurance costs continue to climb, many trucking companies are exploring alternative risk management strategies. One increasingly popular option is group captive insurance, a self-insurance model that can offer greater control, cost savings and customized coverage.
What is a captive insurer? It is an insurance company “that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits,” states the website Captive.com, which provides information about the international captive insurance industry.
Essentially captive insurance plans generate revenue for shareholders, only the shareholders are the policy owners. The plans still pay losses, but they only pay out on those in the captive group, meaning the payouts will be less and the risk will be lower, as the groups are typically made up of better-than-average fleets.
Tom Marros, executive vice president at Alternative Risk Underwriting (ARU), says, “Group captive insurance takes best-in-class companies and puts them together, and they form their own insurance company. They buy the insurance policy, and all profit goes to the trucking fleet instead of insurance companies.”
The benefits of captive plans are more extensive than short-term lower costs. They yield significant long-term cost savings. Marros notes, “The first dollar of insurance is the most expensive. As you get higher, it gets cheaper. The group captive is providing the first layer of coverage and only buying insurance from the ‘marketplace’ for the coverage above the captive, thus limiting the exposure to the volatile insurance market.”
Thus the appeal of a captive insurance plan, as the best-in-class carriers are all together and, due to their high safety standards, the risk of having to pay out for smaller claims is minimal. Group captives reward carriers for investments in safety.
Traditional insurance companies will often be needed to reimburse claims resulting from large or even catastrophic losses. In this case, a captive can be used to shift costs to the insured party for smaller losses or those with less risk. It can provide more control to the insured carriers and eliminates some costs for the insurance company.
Captive insurance plans aren’t for everyone. The real test of whether a captive is the right decision lies in the qualifications. Captive groups have a stricter qualification process. Michael Peden, executive vice president of sales at Reliance Partners, says, “Ideal companies are 25 units or larger, best in class, strong safety record, solid financial conditions and better-than-average losses.”
Carriers that have been in business at least five years have the history that captive insurance plans are looking for. It’s uncommon for carriers in business less than five years to be accepted into the group plan. Captives are also a long-term commitment. With conventional insurance plans, carriers can hop from one carrier to another with little issue, but that isn’t the case with captives. Carriers are expected to remain in the plan for a minimum of five years; the policy remains the same but the annual premiums are much more stable.
Captives aren’t for everyone but Peden adds, “It takes significant capital and a commitment to robust risk management, but for companies willing to invest the time and resources, captives can be a game-changer.”
As for the future of captive insurance plans, it’s going through the technology overhaul that most of the supply chain is going through right now. The more common trends for captives are
technology integration, as well as leveraging data analytics, telematics and AI to better understand and mitigate risks. Due to the increase in cyberattacks, many trucking captives are expanding their coverage to include cyber-risks. Sustainability-focused, captives are beginning to incorporate environmental, social and governance factors into their risk management strategies.
Captive insurance plans represent a powerful tool for trucking companies looking to take greater control of their risk management and potentially reduce insurance costs. However, they’re not a one-size-fits-all solution. Carefully weighing the benefits and challenges, trucking companies can determine if a traditional insurance policy or moving to a captive is the right plan for the future.
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