At the end of October, the Government of Alberta introduced Bill 76, the Captive Insurance Companies Act, which they say “would allow the formation of captive insurers as an alternative to the traditional insurance market to help relieve cost and availability pressures on Alberta businesses.” The fundamental basis of what the Act is proposing is that corporations would be able to own and operate their own insurance subsidiaries. It’s called “captive” insurance because the resulting insurance company is fully owned and operated by those it is insuring.
The Alberta government says that captive insurance will help companies that are finding it difficult to find coverage at a reasonable rate due to lack of competition in the market. There are 70 other jurisdictions in the world that provide captive insurance as an option, including British Columbia, Vermont and Delaware. In B.C, the college of veterinarians offers coverage for its members through a captive insurance subsidiary called the B.C. Veterinary Captive Insurance Company.
Captive insurance defined
A captive insurer’s “primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits,” says Captive.com, which provides guidance on navigating what they call the “global captive landscape.”
The main points of difference of a captive insurance company are:
- It works outside of the regular commercial insurance landscape, allowing them to escape traditional regulations.
- Insureds are putting their own capital at risk. This means that captive insurance companies can also benefit from their own profits as they have far fewer expenses and costs than commercial insurers.
- Insureds work to define their own risks and then finance to cover them. This may provide a captive insurer the opportunity to offer greater coverage options, more stable pricing as risks are better understood, and increased control over such areas as safety, loss, and the administration of claims. Businesses that have established their own captive insurance companies can tailor their coverage directly for their needs and may even report safer workplaces as a result.
Who will use captive insurance in Alberta?
At a news conference on Oct. 27, Finance Minister Travis Toews said that captive insurance options will be attractive to many in the energy industry, for which global capacity is at a decline. In addition to the energy industry, construction and utility companies may also be interested in captive insurance. Even the Motor Dealers Association of Alberta has been involved in the process, saying that car dealers are having a very difficult time finding affordable hail insurance for their fleets. As a mitigative measure, dealerships have been putting up tents and protective shields over their inventory during the summer hail season.
What happens next?
If Bill 76 passes in the Alberta legislature, the government has outlined several ensuing steps as led through what will be the Captive Insurance Companies Act.
- The Act will clearly define the rules and regulations for forming a captive insurance company.
- The Act will provide guidelines and requirements for ensuring the captive insurance company is operating in a safe and sustainable manner in accordance to “sound financial and corporate governance principles.”
- The Act will allow captive insurance companies licensed in Alberta to have the ability to insure a single entity (such as a company), association members or an industry group, and clients with difficult insurance needs they may be able to address.
- The Act will stipulate that captive insurance companies be located in Alberta and that “the province sees all the economic benefits of this new activity.”
Are there any arguments against captive insurance?
In their article, “Captive Insurance: Why or Why Not?” Captive.com outlines many benefits to the captive insurance market, such as:
- No reliance on commercial insurance
- Better opportunities for risk management
- Stable pricing
- More cash flow
- Fewer regulations and interference
- Streamlined claims handling
- Tax advantages
- Investment options
Some drawbacks do exist, however, including:
- The need to hire additional administration.
- Captive insurance industry experts will need to be found and acquired.
- Increased need for internal emphasis on the importance of risk management.
- The existence of a captive insurance company may complicate a merger or acquisition.
- A large amount of financial commitment is required, at least in the beginning.
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