Thursday, June 1, 2023
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What You May Not Know About Purchasing Commercial Insurance

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Author: Joe Emerich, Founding Partner, Xartis Group

Buying commercial property, casualty and benefits insurance for your business is necessary. You need to protect your assets, mitigate risks, and ensure your business offers benefits and protection to its employees. Insurance provides a means to be sustainable when the unexpected happens. Most businesses rely on a commercial insurance broker to guide them through the insurance procurement process. Once insurance is established, for many business owners, the broker relationship is annual renewal paperwork and perhaps a get-together lunch. Task is done. Another year of premiums (and usually unexplained higher premiums) begin.

There could be a better way for your business. Instead of an annual renewal meeting, it could be a celebration of reduced overhead costs and a check for you to invest back into your business. Instead of the same old premium discussion, it could be a conversation with your broker about flexibility in your plan design that reflects fair-priced premiums due to actual claim cost history.

Imagining a different kind of insurance discussion is an option for all businesses. There are options in purchasing commercial property, casualty, and benefits insurance beyond a traditional policy. What options are available to you (now and in the future) can vary by the size of your business, your risk profile, and your appetite for change. Beyond traditional insurance plans, there is an evolution and continuum of options available in the insurance market. These options range from traditional plans everyone is used to and evolve to programs of being self-insured. Within this range are additional options that give you more flexibility and control.

If you are unfamiliar with this range of insurance options, it may be because your current broker represents only traditional insurance plans or may not be incentivized to steer you to a policy that is better suited for your business. Insurance brokers are compensated based on a percentage of your policy, so when your traditional premiums go up so does their paycheck!

Before I share how you approach the dilemma of the insurance broker relationship, it’s important you understand your options.

As illustrated in the chart, most businesses do not move beyond traditional insurance plans or what is called Guaranteed Insurance. As you move away from Guaranteed Insurance, there are options for Retro Programs that allow you to purchase insurance that is tailored to the losses of your company rather than comparatively to the industry. Sounds better, right? After Retro Programs businesses may be eligible for Captive Insurance Programs.

A “captive insurer” is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits. There are types of captives that include participation in a group, wholly owned or even just self-insured.

Although this may sound daunting, having a broker knowledgeable and experienced with these insurance options makes all the difference. Going the route of captive plans will still provide you with a company to administer the plan, and a licensed broker to oversee it. As the insured, you will be more likely to achieve risk financing objectives and realize a return on your insurance spend.

Captive Insureds Put Their Own Capital at Risk

Any insured who purchases captive insurance must be willing and able to invest its own resources. The insured in a captive insurance company not only has ownership in and control of the company but also benefits from its profitability.A policyholder in a mutual insurance company is theoretically entitled to receive dividends if the company makes a profit. However, mutual insurance companies generally accumulate rather than distribute their surplus.

To Achieve Risk Financing Objectives

When the products offered by insurers do not meet an insured’s risk financing needs, the best option might be to join a captive insurer. The main reasons why organizations wish to better control their risk management programs are excessive pricing, limited capacity, coverage that is unavailable in the traditional insurance market, or the desire for a more cost-efficient risk financing mechanism. Other reasons for utilizing captive insurance include

• Broader coverage,
• Stability in pricing and availability,
• Improved cash flow, and
• Increased control over the program.

Broader Coverage

Many captives are established because insurance in the commercial market is prohibitively expensive, poorly matched to the insured’s needs, or not available at all. A captive insurer can successfully provide coverage for difficult risks that is tailored to fit the exact needs of the insured(s)—if the captive operates within sound underwriting, actuarial, and regulatory guidelines.

Stability in Pricing and Availability

Pricing stability is achieved over time as a captive matures and expands its own risk retention capability. The more capital that is accumulated, the greater the captive insurer’s ability to retain risk and insulate itself from changes in the commercial insurance market. A captive insurer can also provide stability in the availability of coverage.

Improved Cash Flow

Cash flow improvements are achieved in several ways. Losses retained through a captive reduce or eliminate underwriting profits; reduced losses increase them. Because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention.

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The underwriting profits and gains from the invested premiums that would otherwise be held by a conventional insurer are retained by the captive. Even with conservative investment portfolios, the dollar amounts are substantial due to the high levels of capital and surplus typically held.
Finally, cash flow is improved by reducing the expense factors associated with commercial insurance. Generally, insurers allot 60 percent or more of premiums taken into loss payments, while the other 40 percent or so covers expenses and profits. Captives have far fewer expense components than do commercial insurers. Estimates for the expense components of captives typically fall in the 15 percent to 30 percent range. This means that for every $10 million in net written premium, a successful operating captive can save insureds $1 million to $2.5 million in expenses alone.
Increased Control over the Program
Ownership and control by its insureds distinguish a captive insurer from a commercial insurer. This is not the type of ownership or control evidenced by a nominal percentage share in the company’s surplus. It means ownership in the company’s strategic business purpose.
Captive insurers offer increased control in several other ways as well. For one, captive owners have more control over insurance-related services such as safety and loss control, and claims administration. Safety and loss control services established by a captive can be tailored to each participant’s individual needs, resulting in safer workplaces and more favorable loss experience. Claims handling services are unbundled and separately arranged. Strict guidelines can be drafted and enforced by the captive. This is preferable to allowing a commercial insurer, whose interests might be more self-serving than an insured desires, to dictate how claims are handled.
So What Next?
Now that you know there may be a better way to mitigate risk you can ask the right questions of your broker, review your past insurance spend questions and explore options within the evolution of insurance solutions. If your broker brushes off your questions or is not experienced in this sort of guidance, maybe it is time for a new broker.


Joe Emerich is a Founding Partner of Xartis Group. Xartis Group offers a fresh and sophisticated approach beyond traditional insurance models you have come to know well. Where managing risk yields opportunities to seize control of your long-term insurance outlook, enhance your profit potential, and unlock the freedom to devote attention to what matters most; your business. To learn more visit or contact Joe at

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