All fleets are experiencing a growing challenge with the cost and availability of fleet insurance. In normal market conditions, premium costs are usually determined by the fleet’s loss history. The better your safety record is, the lower your insurance cost will be. Unfortunately, these rules do not apply to commercial auto insurance, where the market has become so challenging that even if your loss history is relatively clean, insurance premiums seem to increase significantly on every renewal.
As a result, corporate risk managers are frequently looking into alternative risk options for their fleet, with captive insurance as one of the most common options.
What is captive insurance?
A group captive insurance program is a company or exclusive group of companies coming together to form their own insurance company. A homogeneous insurance captive consists of members that are in the same market. This provides the ability for unique insurance challenges to be properly included in the captive coverage model. The group captive is taking on a layer of risk that is typically transferred to the insurance company. An insurance captive is typically run by a captive manager that provides the outsourced day-to-day management of the captive.
How does captive insurance work?
Almost 30 percent of your insurance premium goes towards paying fixed expenses the insurance carrier incurs (marketing and administrative costs). The remaining 70 percent of the premium is set aside in a loss fund to pay for losses. Underwriting profit, defined as premiums collected after losses are paid out and administrative expenses have been deducted, is typically retained by the insurance company in a typical insurance relationship. In an insurance captive, however, these profits can be returned to the individual captive members. In addition, captives may financially benefit by investing collected premiums.
Uncovering the benefits of captive insurance for fleets
Managing risk is a critical aspect of running any business, but it’s particularly complex when you’re responsible for a fleet of vehicles. Whether you operate a delivery service, a transportation company, or a fleet of company cars, finding the right insurance solution is paramount. Let’s delve into some examples of how captive insurance can benefit fleet operations.
- Customized coverage: One of the key advantages of captive insurance for fleets is the ability to customize coverage to meet specific needs. Unlike traditional insurance policies that offer standardized packages, captives allow fleet managers to tailor coverage to the unique risks associated with their operations. For example, a company with a fleet of delivery trucks may face different risks than a taxi service or a construction firm. With captive insurance, fleet operators can design policies that address their specific concerns, ensuring comprehensive protection.
- Cost control: Cost control is another significant advantage of captive insurance for fleets. By forming a captive insurance company, fleet operators can retain underwriting profits and investment income that would otherwise go to external insurers. This can result in significant cost savings over time, especially for fleets with favorable claims experience. Instead of paying premiums to a third-party insurer, the captive retains funds within the organization, which can be used to cover claims, invest in risk mitigation strategies, or even generate additional revenue.
- Long-term stability: Captive insurance provides fleet operators with greater stability and control over their insurance programs. Unlike traditional insurance markets, which can be subject to fluctuations in pricing and availability, captives offer more predictable and stable coverage. This long-term stability is especially valuable for fleets with unique or challenging risk profiles that may struggle to find affordable coverage in the traditional market. With a captive insurance arrangement, fleet operators can mitigate the impact of market volatility and ensure consistent protection for their assets and operations
- Enhanced risk management: Effective risk management is essential for fleet operators to protect their assets, minimize losses, and ensure business continuity. Captive insurance facilitates enhanced risk management by providing greater visibility and control over the insurance process. Fleet managers can closely monitor claims experience, identify trends and patterns, and implement proactive risk mitigation measures to reduce the frequency and severity of losses. Additionally, captives often incentivize risk management efforts through profit-sharing arrangements, encouraging fleet operators to invest in strategies that improve safety and reduce exposure to potential liabilities.
- Strategic flexibility: Perhaps one of the most significant benefits of captive insurance for fleets is the strategic flexibility it offers. With a captive insurer, fleet operators have the autonomy to make decisions that align with their long-term objectives and priorities. Whether it’s expanding coverage, adjusting deductibles, or exploring alternative risk financing strategies, captives empower fleet managers to adapt their insurance programs to changing circumstances and market conditions. This strategic flexibility is invaluable in a dynamic business environment, allowing fleets to respond swiftly to emerging risks and opportunities while maintaining financial stability and resilience.
- Market volatility is buffered: The insurance market fluctuates between hard and soft markets. When markets are soft, your premiums seem more reasonable. When markets are hard, your premiums experience an increase (much like current commercial auto premiums). Once you are part of a group captive, your rates become more steady and predictable, so you do not experience the volatile fluctuation that the rest of the market experiences.
- Sharing best practices: Business owners get the privilege of being part of a group of companies that are like-minded, dedicated to safety and improvement and are typically best in class. You get the benefit of learning from other companies, not just on safety and insurance but also on other aspects of your business (i.e., how to avoid worker shortages and attract talent, new technologies, etc.).
Summary of captive insurance for fleets
Corporate risk managers at companies with fleets are finding that participation in an insurance captive can be valuable since organizations with similar philosophies on risk management and safety can benefit from a shared motivation to achieve a higher safety standard through the adoption of best practices and safety technology. By joining a superior group of safety-focused members, a company’s fleet insurance situation can ultimately lead to improved loss histories and more favorable insurance costs, and make a significant impact on the company’s bottom line.
