We’ve all probably heard the phrase “captive insurance.” 

But in case you think it’s to cover losses if you are taken hostage in a third-world country, captive insurance is actually when a company creates its own insurance company to provide coverage for its own risks. Instead of relying on traditional insurance companies, the company forms its own subsidiary to handle its insurance needs. This allows the company to have more control over its insurance costs, coverage, and claims. The captive insurer can also generate investment income from the premiums it collects. It’s like creating an in-house insurance company tailored specifically to the needs of the parent company, providing greater financial flexibility and potential cost savings.

AZ BIG Podcast: Cathleen Walker of PNC talks captive insurance

To explain everything you need to know about captive insurance and how it may boost your bottom line, Az Business sat down with two experts, Cathleen Walker, regional president for Phoenix and Northern Arizona for PNC Bank — and one of Az Business’ former Most Influential Women in Arizona — and Anjanette Fowler, managing director of institutional and asset management for PNC Bank.

Az Business: What do business leaders need to know about captive insurance?

Anjanette Fowler: There are some complexities to it and certain considerations to think about before heading down this path. It is a regulated entity. But it is a risk financing tool that organizations from nonprofits to large publicly traded organizations and everything in between can utilize to help manage the cost of their risk, which has become a real challenge.

Cathleen Walker: We’ve heard from many clients seeing 25% to 50% increases in their insurance premiums and — in some cases — not even able to get certain coverages. 

AF:We are busier than we’ve ever been in helping clients connect the dots with how they can find some relief from the insurance premium pressures that they’re experiencing. I’ve been helping companies invest the assets that accumulate in these captive structures for more than 25 years and this is probably the busiest I’ve ever seen it when it relates to the cost of financing your risk. 

AB: How tough is it for a company to set up captive insurance?

AF: I think most organizations might feel a little bit overwhelmed with the thought of starting an organization that is regulated. But it’s important to understand that these are useful tools and there are guardrails for you in the regulatory environment and it’s not overly burdensome. It’s a very friendly regulator environment. It makes sure that whatever structure you put in place to create and and manage your risk, it’s done in a prudent fashion.

AB: How is captive insurance managed for a company?

AF:It’s very rare that you would have your in-house personnel overseeing these organizations. You typically see it outsourced to specialists who report to stakeholders within the organization. The regulator really is a member of that team. It’s not an adversarial type relationship. 

CW:Can you talk a little bit more about the process and how you go about forming a captive if you don ’t have one? 

AF: PNC prides itself on being a valued partner to our clients and prospective clients. While we’re not the lead quarterback of the captive insurance team that you put on the field, we’re involved and entrenched in the solution. We are knowledgeable as to how to go about fielding that team and making those connections. The player that you’re going to draft for your team — your quarterback — is the captive manager. The responsibility of that organization is to do a cost-benefit analysis to determine the risk tolerance and decide if a captive self-insurance structure is going to pay off for you.

AB: Who’s the ideal candidate to go to the captive structure? 

AF:We’ve seen some big changes in the last few years. COVID was a little bit of gasoline on the fire. When we think about risk management, we had a lot of business interruption, supply chain disruption. Folks thought they had coverage in the traditional commercial market, but found out when they read the fine print, there were lots of exclusions. So, the ideal candidate for captive insurance has changed tremendously. We’re seeing smaller and smaller organizations, even nonprofits, being forced to go down this path. There are some rule-of-thumb metrics and  other considerations. But if you’re paying $1 million or more in annual premiums, captive insurance might be something you want to consider for your organization. 

CW:What are some of the things driving the increased interest in captive insurance? 

AF: Business interruption. COVID kind of pulled back the curtain on that. Supply chain disruption is another issue. What we’ve seen transpire, with hurricanes, wildfires, floods. Even if we didn’t experience that loss directly, our premiums are impacted. But one of the things that we’re all seeing on both a personal level and on a business level is cyber risk. It’s so huge right now. It’s almost unquantifiable. A lot of experts in this space feel like cyber will eventually become much like a terrorism-risk-type coverage, where the government is going to have to come kind of form a backstop there. But that’s one that’s certainly driving a lot of the consideration. It wouldn’t be the only risk you would put into a captive, but it’s one that we see go into captives a lot just because of the ransomware. 

AB: Other than having more control over coverage, what are other benefits of going with captive insurance?

CW:One of the key benefits of captive insurance is you’re paying the premium to yourself, so you can invest those assets and you have control over how you’re investing those assets through your own investment policy and other risk tolerance applications.

AF: That is one of the great features of captives. It does give you greater control. When you’re doing your budget as an organization, you want to be able to project costs. But when you or someone else has some sort of catastrophic event, it impacts your premiums and you see these spikes. You’re never able really to ever be able to effectively project what those costs are going to be. Utilizing a captive structure allows you to smooth those costs out and be able to project and control how those roll through and impact your parent company, and that’s a great benefit. 

AB: If business leaders want to learn more about captive insurance and how PNC can help them, how do they learn more? 

CW: The best thing to do is to reach out via our website — pnc.com/iam — and we can get them in touch with the right folks within our organization. It’s a very complex category of insurance and a lot of education and other resources are available to help walk people through that.