Great Business Ideas: Join a Captive Insurance Company to Cut Costs

Great Ideas for your Small Business:

Join a Captive Insurance Company to Cut Costs

Sign maintenance workers perched in “cherry-pickers” three hundred feet above Times Square would make most insurance brokers sweat.

But not Richard Butwin, who has been the Artkraft Strauss Sign Co.’s broker for the past seven years. Six years ago, Butwin, a principal in the Nathan Butwin agency in Great Neck, New York, encouraged Artkraft to join what is known as a “captive” insurance company.

Captives are a form of self-insurance designed to serve small manufacturing companies seeking to reduce their workers’ compensation and liability insurance premiums. There are about 3,200 captive insurance companies in existence.

“The primary reason to join a captive is to gain long-term control over your insurance costs and make them level and predictable,” said Butwin. To take advantage of favorable tax benefits, most captives are based in Bermuda or the Cayman Islands, Butwin said.

Captives are best suited for companies with good safety records, especially ones that are willing to implement worker safety programs aimed at keeping claims at a minimum. Members of the captive hire an outside firm to process claims and purchase extra insurance to pay off major claims. They share overhead expenses and investment income, if any remains after paying all necessary expenses and claims.

He said the annual premium is based on each company’s five-year claims history. “Companies pay about 20 percent less going into the program and over time can save 40 to 60 percent on their insurance premiums,” he said.

Butwin encouraged Artkraft to join a captive insurance company about six years ago, when its workers’ compensation and liability insurance premiums approached $500,000. Insurance is a major expense for the 105-year-old sign maker. The company’s eighty-five employees design and build neon and electronic signs in a 40,000-square-foot building overlooking the Hudson River. Published reports estimate the privately held company’s annual sales at about $15 million.

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Like many successful entrepreneurs, president Tama Starr said she is too busy running the company to fret about insurance. “Workers’ comp is a big issue, and it’s always been a headache,” said Starr. “This [the captive] has offered some relief.”

Neil von Knoblauch, Artkraft’s chief financial officer, said the captive has reduced the company’s overall insurance bill by about 20 percent. Von Knoblauch, who served on the captive insurance company’s board of directors, says he received detailed monthly reports of all claims and activities. He also voted on whether to admit new members to the group. In past years, he’s watched their captive’s membership grow from sixteen to twenty-five members. The member companies are involved in a variety of industries located across the United States, he said.

As for the investment income shared by members, von Knoblauch says “It’s really a little bit of icing on the cake.” Kept in an offshore bank account, the money earns about 5 percent on a tax-deferred basis. “The money that’s down there is really to pay claims—you don’t want to put it in risky investments,” said von Knoblauch.

For more information on captives, contact your insurance broker.