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Captive Insurance Considerations

By Caroline Paulus, CPA, Audit Manager at Blue & Co.

Insurance costs for not-for-profit organizations, especially state and national membership organizations, can vary widely based on several factors, including size of the organization, location, and specific risks involved. As an example, here are some general estimates, we see specific to state and national fraternities and sororities:

  • General Liability Insurance: Most membership organizations are required to have general liability insurance with coverage of at least $1,000,000 per occurrence and $2,000,000 in aggregate.
  • Annual Premiums: Liability insurance premiums range from $300 to $600 per member per semester.
  • Event Coverage: For specific events membership organizations might want to hold, additional coverage might be needed, which can cost around $2,600 or more per event.

These costs can add up, especially for larger organizations or those hosting multiple events throughout the year. As a result, not-for-profit organizations have started exploring other options, including captive insurance. Now you may ask, “What is captive insurance?” It is a form of self-insurance where an organization creates a subsidiary insurance company to provide coverage for itself. This can be a strategic option for organizations looking to manage their risks.

 

Here are some pros and cons to consider:

Pros

  1. Cost Savings: Captive insurance can reduce overall insurance costs by eliminating the profit margin that traditional insurers add to premiums.
  2. Control Over Coverage: Organizations can tailor their insurance policies to meet their specific needs, ensuring comprehensive coverage for unique risks.
  3. Underwriting Profits: Any underwriting profits (the difference between premiums collected and claims paid) can be retained within the organization.
  4. Investment Income: The funds held in reserve for potential claims can be invested, generating additional income for the organization.
  5. Risk Management: Captive insurance encourages better risk management practices, as the organization directly benefits from reduced claims.

Cons

  1. Initial Setup Costs: Establishing a captive insurance company requires significant initial investment and administrative effort.
  2. Regulatory Oversight: Captives are subject to regulatory requirements, which can be complex and time-consuming.
  3. Capital at Risk: The organization’s capital is at risk if claims exceed the premiums collected.
  4. Limited Diversification: Captives may have limited ability to spread risk compared to traditional insurers.
  5. Potential Liquidity Issues: Ensuring sufficient liquidity to pay claims can be challenging, especially in the early years.

As the overall landscape related to claims and insurance has evolved over the last decade, membership organizations and other not-for-profit entities are exploring scenarios like captive insurance as an option to respond. If you need assistance or have questions concerning captive insurance, contact your local Blue & Co. advisor.

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