By: Mark A. Rysberg
Captive insurance within the building construction industry is well established. Such programs are generally developed to reduce insurance premium costs and to approach risk management from a strategic perspective. Captive insurance programs can provide additional strategic benefits when operated properly. For example, by retaining a large portion of the insurance premium expense (i.e. by paying premiums to a captive controlled by the contractor or its principals) the captive owners can generate a cash surplus over time, as well as creating a secondary source of cash-flow, which, when viewed in the context of a consolidated cash-flow report, should increase the value of the parent or affiliated entity. From those perspectives, one critical part to maximizing cash surplus and cash-flow is to maximize the amount of premiums paid into the captive entity. In that sense, the extent to which a contractor can maximize the aggregation of cash-surplus and optimize additional cash-flow is dependent, in part, on the amount of premiums that can properly be paid into the captive insurance company.
Generally, captive insurance programs are modeled based on traditional insurance arrangements whereby a construction project owner, contractor, and subcontractors procure their own insurance policies. In that arrangement, the premiums available for a contractor to pay to its captive insurer is limited by the premiums paid for the insurance it procures. In other words, the captive insurance company owned by a contractor does not capture premiums paid by the project owner and various subcontractors. Savvy construction contractors that utilize captive insurance programs look for ways to increase the amount of premiums available.
A contractor controlled insurance program (CCIP) may provide a creative solution. A CCIP is a project-specific insurance program that is controlled by the contractor. In that sense, the insurance parameters are defined at the project onset and the contractor is responsible for procuring the insurance for the project, paying the premiums, and paying all losses within the deductible. In this sense, a CCIP provides a contractor’s captive insurance company to potentially collect more insurance premiums than would otherwise be available. Notably, these additional premiums have little to no actual cost to the contractor because the premiums allocated to the owner are added to the contractors bid while premiums attributable to subcontractors should be deducted from their bid. In other words, a CCIP can provide an efficient mechanism for driving additional premiums into a contractor’s captive insurance company.