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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.
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.
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:
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:
What’s more, the process of exiting a captives arrangement can present its own significant challenges.
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.
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.