Introduction

Just like renting a home, the insurance policies we rely on are prebuilt. They are temporary arrangements where the terms are set. We sign the contract, and send the check.

Renting has its perks. Major expenses are someone else’s problem. We don’t invest much since it’s not ours to keep.  We even tolerate bad furniture when it’s “good enough for now.”

Under the right circumstances, renting makes perfect sense. Until it doesn’t.

Like when we need more space. Or when the rent increases while the house stays the same. Or when the old sofa creates new back problems.

Buying traditional insurance is no different.  The insurer sets the price and the terms for the coverage, with a focus on profit.  For the business buying the coverage, what you see is what you get.

Choosing to buy traditional insurance, then, is an act of accepting short-term benefits at the expense of the control, stability, and long-term value.

Transition from Renting to Owning Insurance

There are lots of ways to identify when you may have outgrown the insurance renting arrangement. Here are just a few:

If you’re ready to ditch renting for ownership, captives provide a clear path.  Technically, a captive is an insurance subsidiary, owned by your business. They come with all the advantages of designing, building, and owning a home.  Let’s explore how.

Building Your Insurance Dream Home

The process is complex, and at times confusing. There are upfront costs and dozens of experts involved, along with new responsibilities, rules, and risks. But, you end up owning your own insurance company, designed specifically to fulfill your insurance needs and support your business growth.

Creating a captive allows you to take control and capture value.

The sections below compare captives to traditional insurance:

Upfront Costs

Renting is designed for convenience, where limited upfront cost is part of the equation.

Creating a captive requires an upfront investment. Your business is responsible for funding the captive with an annual premium, and there will likely be a minimum cash balance the captive must retain. Depending on the coverage(s) and the domicile (where your captive is registered), collateral may also be required.

Forming a captive requires not just capital, but also time, effort, and a readiness to navigate the complexities of insurance.

Fortunately, you don’t have to tackle this alone. Just as you wouldn’t draft your own blueprint or find electricians and plumbers yourself, a captive manager can act as your architect and general contractor throughout the planning and formation process.

After it’s built, your upfront investment pays off by transforming into an asset, tailored to serve your needs while appreciating over time.  Captive managers can also help here, operating like a property manager to keep the home in good order year after year.

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Customization

When you rent a home, you’re bound by the owner’s rules. You can’t renovate, or often even repaint without permission. Traditional insurance works similarly – you have limited control over the coverage offered in the policies, even if they don’t fully match your needs.

Captive insurance, however, provides the freedom to create policies that precisely address your circumstances. Like designing rooms and picking furniture, every insurance need and preference can be explored with a precision that traditional insurance could never replicate. Your coverage becomes exactly what you need, nothing more, nothing less (like the coverage gaps in traditional policies).

Long-Term Benefits

Here’s the heart of it – equity. With traditional insurance, the premiums you pay are like rent: simple and easy, but the money's gone once it’s paid.

With a captive, you’re not just paying premiums; you’re investing in a system that can yield significant returns over time. A captive allows you to retain any premium not spent on losses, turning every dollar you spend into a dual-purpose asset. By day, it provides insurance coverage; by night, it funds investment opportunities, growing your wealth just like a house appreciates over time.

Risk Management

With traditional insurance, risk management is handled by the insurer. It’s genuinely difficult to promote proper risk management when the reward is increasing premiums, regardless of performance.

Captive insurance changes that dynamic. As the owner, you control the risk management program, and directly benefit from its success.  Even ambitious risk management is possible when you own the outcome. Like proactively servicing your air conditioner before the Summer heat.

Suitability

Traditional insurance is ideal for resource-strapped businesses, with simpler coverage needs. The arrangement values convenience over control and long term costs.

Captive insurance is better suited for businesses that are overpaying on premiums, with complex risk needs.  The arrangement values stability, optionality, and cost efficiency over familiarity and convenience.

Claims

In traditional insurance, claims processing can be complex and time-consuming, like dealing with a landlord for repairs, where you are also not guaranteed to like the outcome.

When you own your home, repairs are handled promptly and efficiently to minimize disruption.

Captive insurance offers swift, predictable claims processing with fewer administrative headaches.

Cost Efficiency

Traditional insurance pricing, like rent, is subject to market premiums, which can increase unexpectedly.  Fluctuating premiums challenge forecasting and can seriously impact operations.

Captive insurance allows you to avoid inflated market premiums by placing profitable coverages into the captive. This cost efficiency ensures that your insurance expenses are more predictable and manageable (like a 30-year fixed rate mortgage), providing better financial and operational stability.

Conclusion: The Path to Insurance Ownership

Choosing the right insurance strategy is a big decision, much like choosing between renting and building a home. Captive insurance offers unparalleled control and opportunity, making it an ideal choice for businesses in a position to take the reins. However, it requires an initial investment, and a commitment to managing the complexities over time.

About XN

XN Capital is the smartest way to go captive. Our world class experts and advanced platform deliver the clarity, intelligence, and flexibility to transition your business out of renting and into your insurance dream home.