Typical insurance is a risk transfer program that fleets use to operate businesses with minimal stress. However, lately, captive insurance has been gaining popularity in the market.

And it makes sense for some fleets to consider it, according to a speaker at the TTSAO’s annual conference in Brampton on Feb. 29.

“In the industry like trucking, insurance is going to be probably the second or third most expensive item on your annual budget,” said Jaqueline Caceres, president of BIS Risk Solutions. “If you can control that cost, that really changes the game for a lot of folks.”

With this form of self-insurance, in which companies create their own insurance company (the “captive”), carriers can provide coverage for their own risks. There are several models of such insurance.

And while getting captive insurance is not easy, many businesses are eager to switch to it. This includes some of the medium and larger-sized trucking companies across the country.

However, most jurisdictions in Canada and the U.S. do not have a regulatory or legislative framework for captives to exist, Caceres says.  As of now, the only two provinces in Canada with captive legislation and framework are B.C. and Alberta.

While B.C. had the legislation in place for more than 30 years, there are 20 captive companies registered so far. However, Alberta had just introduced its captive legislation 18 months ago, and the province already has 17 captive companies registered.

Businesses in other provinces mostly set up their captives in Vermont, Bermuda, or the Cayman Islands.

Pure and group captives

When it comes to the captive insurance model, pure and group captives are the most common in the trucking industry, says Caceres.

Pure, also known as ‘single-parent’ captive, is popular among large companies with large fleets and revenues, where they can afford to cover the cost of any claim out of pocket.

“They own a company – let’s say it’s domiciled in Bermuda – they operate all their payments through that one domicile, and if they make a profit and positive year, they keep that profit.”

The group captive model includes multiple companies that are shareholders of that captive and they are the ones that buy the insurance policies. Caceres says this is very popular among fleets in Southern Ontario, citing Polaris Captive Insurance Group as one example.

Through joint efforts, companies can benefit from more favorable insurance terms, greater control over their insured products, and better financial outcomes compared to the traditional insurance market, she says.

Right fit for your fleet?

Caceres says that carriers with around 30 to 50 units or more might find it economically feasible to join a group captive, whereas smaller companies may not have enough premium volume to make it worth it.

“If your premium is $100,000, the insurance company’s gonna take 40% of that to pay your claims, and $40,000 is just a quarter of a truck,” Caceres explains. “Versus if your premium is over, say, $500,000-$600,000. Now, you’re talking about more of a bulk. You could take $200,000-$300,000 and put that in a claim spot.”

Consider your pain points

When it comes to deciding if captive insurance is the best bet for your fleet, Caceres recommends looking at the company’s pain points.

This includes assessing factors such as carriers’ performance in the general insurance market, the company’s claims experience, and how they perceive their treatment by insurers.

For example, despite running a tight ship and demonstrating responsible behavior on the road and in the offices, some fleets also might still face price volatility in the marketplace.

This is why companies should inquire if they’re unfairly grouped with high-risk carriers in the same category, which can affect their own success and pricing. In such a scenario, captive insurance would make the most financial sense.

Benefits

In this particular case, carriers are recommended to take advantage of such an insurance model, since it will give the company control of the cost, even despite the external market conditions, says Caceres. She adds being grouped with poor-performing companies is the most common complaint she hears from her customers.

Other benefits of captives include claims handling control and the ability to retain profits from good performance.

“If you buy an insurance policy from [a market insurer] and you have a great year of no claims – congratulations, good for you, but [they] keep their profit. And then they come back to you with a 5% or 10% increase,” Caceres explains.

“If you’re the owner of a group captive model or a pure model, and you have a great performance, then you get to keep those profits as your own insurance company.”

Risks and misconceptions

However, captives also come with risks such as exposure to poor-performing partners in a group captive, and regulatory and tax complications – whether the domiciles are in Canada or abroad.

Caseres warns not to be fooled by the misconceptions about captives, as some falsely expect them to be cheaper than traditional insurance and assume they are suitable for all companies. Captives are not tax avoidance vehicles either, she notes, adding they cannot turn poor risks into good ones.

“When you’re going with captive, it’s like you’re getting married,”

Jaqueline Caceres, president of BIS Risk Solutions

She also says that captives have to be a long-term commitment due to slower claim resolution.

“I always tell my clients, When you buy a normal insurance policy, it’s kind of just dating somebody for a year. You could break up, and a buyer shifts to a different insurance company, right? Pretty much nothing will happen,” Caceres says. “When you’re going with captive, it’s like you’re getting married. And when you get married, there’s a lot that goes on. If you want to get divorced, you can, but it’s gonna take a long time.

“One of my clients wants to exit my captive today. They will not see a return on their investment funds and their collateral funds for at least three years, if not five. The oldest claim that I have opened right now is eight years.”