Unforeseen events highlight benefits of captives

The captive market has been impacted by a string of events, both in the US and worldwide, that have made many commercial carriers and entrepreneurs pause to figure out what their priorities are in risk management, capital investments, marketing, taxes, and operational innovation.

Speaking ahead of the annual CICA conference taking place March 5-7 in California, David Liptz, principal of Liptz & Associates CPAs, said some might come to see captives as a form of “risk management” meaning funds are available for uninsured and unforeseen events.

Liptz highlighted several unforeseen events including Covid 19, the Russian invasion of Ukraine, and the sudden uptick in inflation in many countries, as having had a particularly strong impact on some companies. He also underlined the unexpected nature of these events.

“[These companies] can react more quickly if they have their own insurance company, rather than waiting for a claims officer from a commercial carrier to arrive onsite to begin the claims process and provide a claim payment,” Liptz told Captive International.

He also pointed to other recent events such as the devastating earthquake that hit Turkey and Syria, the flooding that hit California and even the recent cold snap there that might impact the almond growers of Central California by damaging the almond blossoms and limiting the crop.

Despite the recent uptick in inflation Liptz said that he doesn’t think that there will be a change in the investment strategies of captives and their owners, stressing that many of these include middle management clients with conservative investment strategies.

He said that insurance by its nature is a conservative business and investment strategies normally should mirror a company’s “conservative” business practices.

“There could be some deployment of the company’s surplus in more entrepreneurial manners,” he said, “But not that much – the money must be there to pay a potential claim, so I don’t foresee any big changes in investment strategies.”

He said that the IRS’s continued interest in captives had been noted by the market, but stressed that there are more good players than bad ones when it came to operating a captive for business and risk management reasons, adding that education remains an important aspect of insurance and specifically, captives and self-insurance.

“We have to educate all those who are involved in the insurance industry, from consumers, insurers and regulators about the power of controlling risk management with their own captive insurance company,” said Liptz.

He said that there had been an increase in interest in captives after Covid-19 and the lockdowns that had followed, explaining that business interruption cover, or the lack of it in places when Government assistance was delayed and then ceased, had been a factor in that, as a captive can pay out when a commercial carrier might exclude the risk from coverage.

Liptz stressed that current events have been particularly dynamic of late, with few able to predict accurately what might happen at times, a particularly pertinent point due to the one-year anniversary of the Russian invasion of Ukraine.

“Having the creativity of an insurance company, akin to being an entrepreneur must be continued to be promoted from an educational standpoint,” Liptz told Captive International. “Just like a capitalistic market, the opportunities that exist are endless.”