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Your business is unique. While you may operate in the same market as your competitors, the conditions surrounding your company are yours and yours alone. As a result, your insurance coverage should also be unique to your business and be specific to fit your needs.

You may find that a traditional insurance policy isn’t right for you and wish to explore the alternative market, including captives. This type of coverage involves more of a balance of risk between you and the insurer and could potentially be more advantageous for your business.

So what are captives? And how do you know if that is a viable option for your agriculture business?

What are Captives?

To understand captives, imagine a spectrum of all possible insurance options. On the one end is a traditional insurance policy, where the insurer accepts all of the risk and the policyholder is charged accordingly. On the other end is operating without an insurance policy, where the business owner pays no costs toward insurance, but takes on all the risk should a loss occur.

In between are a variety of alternative options, one of which is captives. Captives occur in all markets, but are a form of self-insurance where the amount of risk is split more evenly between insurer and policy holder.

In a traditional insurance market, claims for all policyholders are paid out of the same pool which each policyholder contributes to. In a captive market, you are responsible only for your claims.

How Do Captives Apply to Agriculture Businesses?

There are captives available for all markets, including agricultural businesses. A captive offers significant benefits over a traditional policy by providing coverage for claims that are typical for the agribusiness field but are less common across other industries. These items include protection against risks such as product recalls and pollution claims.

In a traditional insurance market, food recalls and pollution instances are difficult for insurers to cover because the scope of the claim can vary greatly. A recall of a specific product from a specific business may be fairly straightforward, while the recall of an entire crop from a geographic location could be a more complicated claim of several billions of dollars. Likewise, a pollution claim could range from a small, locally contained chemical spill to one that impacts air, water, and wildlife for thousands of acres. Because of the levels of uncertainty with these types of claims, coverages can either be difficult to find or, when they are available, can be very expensive.

A captive solves these issues because the policyholder is assuming more of the risk. If the traditional insurance market won’t cover an instance unique to your business, you have no other choice than to assume that risk yourself. Additionally, if your business standards are higher than other competitors, a captive ensures that you’re not subsidizing competitors’ poor business practices that may result in more claims.

How Do I Know If A Captive Is Right For Me?

Unfortunately, because every company is unique, there’s no simple answer to knowing if you should pursue an alternative option for your insurance coverage. But by asking yourself these five simple questions, you can at least determine whether or not to explore further.

1. Do you overpay for your insurance? Most people would immediately answer yes to this question, but consider the question from another perspective: is the benefit you receive from your insurance coverage in line with how much you spend on it?
2. Does your insurance seem harder and harder to source every year? Do you have difficulty finding providers to offer you the coverage you need? Are you constantly having to change insurance carriers because the policy you want is no longer offered?
3. Are there fewer and fewer options every year? You should have more than just one or two options for your insurance coverage. A lack of competition for your business is going to make it impossible for you to compare prices and features.
4. Are you looking for innovative ways to manage your risk? Captives aren’t for everyone, but if your business operations result in fewer claims than what you believe to be normal for your industry, you may wish to find a creative solution.
5. Do you have an interest in increasing your risk in order to bring down your cost? Ultimately, in a captive, you’re paying less up front for your coverage, but if you need to file a claim, you’ll be responsible for covering more of the losses. It all depends on your tolerance of risk.

If you answered yes to all five of these questions, then a captive may be right for you.

Contact our team if you’re ready to discuss your alternative risk options. We can help determine if exploring a captive is right for your business.

Note: This communication is for informational purposes only. Although every reasonable effort is made to present current and accurate information, Oswald makes no guarantees of any kind and cannot be held liable for any outdated or incorrect information. View our communications policy.