Disasters are inevitable, but it’s how companies prepare for them that will either set a business up for success, or failure in the future. For many business owners, planning for this unknown element can be a daunting task, which is why so many companies are not ready for the worst-case-scenario.
A recent study by research firm Marshall & Swift/Boeckh revealed 75% of businesses in the U.S. are underinsured by 40% or more. Furthermore, the Insurance Information Institute estimates that close to 40% of small business owners have no insurance at all. But successful business owners will urge – don’t let this be you.
Violet Stephens started Proje Inc. in 2004 and has grown her project management company into a success that makes $1 million in revenue annually. Stephens is one of many women leading the way in a growing trend. Women-owned businesses are on the rise. According to the latest Small Business Trends report released by Guidant Financial, nearly a third of small business owners are women, that’s up from 27% last year and experts expect those numbers to continue to climb.
According to the Annual Business Survey, in 2018, women-owned businesses reported nearly $1.8 trillion in sales, shipments, receipts or revenue and employed more than 10 million people.
Women are starting their own businesses for several reasons.
- 29% wanted to be their own boss
- 20% wanted to pursue their own passion
- 13% were dissatisfied with corporate America
There’s much to consider when starting a business. One of the hardest, but most important pieces is making sure to have the right insurance coverage. For Violet Stephens, one thing she wishes she had done earlier – invest in a captive insurance company.
After a booming first decade in business for Proje Inc. that saw exponential increases each year, Stephens says, “We had the staying power, cash flow and large projects, some of which would be devastating to stability if lost.”
That’s when, Stephens’ mentor and CPA introduced her to the concept of a captive. “When things are awesome and stable, and everything is going great, you don’t know how much you need a captive. You do it to offer you flexibility,” Stephens said.
In 2015 Proje Inc. lost a key, $10 million client due to market changes out of their control. And thanks to a captive policy secured for “loss of key client,” they were able to stay afloat. “It was significant. I was able to keep my people. I would not have been able to stay in business without the captive,” said Stephens.
Unforeseen hardships will pop up. A 2016 study by Insureon found one third of business owners surveyed experienced an event that could have led to a claim. If a business owner is faced with an issue like a natural disaster, employee injury or even a lawsuit, they’ll have to cover the costs themselves out of pocket. Sometimes covering these costs without insurance can force the business to close. SCORE, a nonprofit association dedicated to helping small businesses, suggests that 40% of businesses never reopen after a disaster.
Smaller businesses may be less equipped to handle risks like natural disasters, supply chain disruption, loss of a key employees or cybercrime-related loss. But it is possible to insure against these risks. It’s also critical that smaller businesses have the assets and cash to survive these threats
A captive insurance company enables businesses to choose to own their own insurance company. This option can offer flexibility and the ability to tailor coverage specific to your business needs. Captives can also offer coverage for gaps where commercial insurance policies do not cover.
A captive insurance company is a real insurance company created by a business or its owners to primarily provide property and casualty insurance to affiliated businesses. Because captives are usually owned by the same economic interests that own the operating business, the captive can be considered a “formal” method of self-insuring various risks.
Here Are Some Tips for Things You Can Do Now to Be Ready… Just in Case:
1. See If You Meet the Criteria to Own a Captive Insurance Company
For a captive insurance company to be a good fit for your business, the most important question to ask is whether your business can be interrupted. Consider if a natural disaster, attack, unrest or pandemic disease happened—could it prevent your business from being able to operate?
If you can answer a “yes” to any risks on the following list, then captive insurance is worth considering for your business:
- Loss of a key supplier
- Loss of key employee
- Cyber attacks
- Intellectual property theft
- Natural disasters
- Utilities, machinery or technology failure
- Environmental hazards
- Regulatory compliance
- Reputation damage
- Staff sickness/absence
- Transportation delay or damage
- Terrorism, war and political unrest
- Increasing health care costs
2. Do You Have Un- or Under-insured Risks?
Next, conduct a risk assessment and determine the risks your business is most likely to face. Then, look at your insurance plans to see if the risk is insured.
3. Do a Cost-Benefit Analysis
Owning a captive insurance company can help to increase cash flow with investment income. There can also be tax advantages.
But there can also be an administrative burden to properly run a captive. Run an analysis to see if the benefits outweigh the costs.
4. Invest Before You Need It
For Violet Stephens, the biggest piece of advice is to invest in a captive before you need insurance or reinsurance. She says, “Plan for the day you will need it because you will. There’s no reason to wait until you’re at the top of your game to invest in a captive. I wish I would have done it earlier.” The captive can be scaled up or down depending on cashflow.
5. Find the Right Team
Selecting qualified professionals to assist with the creation and management of a captive is essential to obtaining the benefits of captive ownership. Do some research and find professionals well-versed and experienced in all areas of captives, that are also highly-rated by their peers.
6. Surround Yourself with Great Mentors
Stephens says her captive investment and eventual coverage that kept her business open was all thanks to a great professional mentor. “Surround yourself with great mentors – personal, professional and spiritual – this is the secret sauce. Include a financial advisor.”
7. Don’t Be Afraid of the Unknown
And finally, don’t fear what you don’t know. Though it’s understandable for there to be apprehension, educate yourself, and pick an option that works best for you and your business.
About the Author
Shoshanna Simmons serves as the Director of Client Services of CIC Services, LLC, where she administers and oversees all client aspects throughout the Captive formation, retention and management process. She has more than 10 years of risk management and insurance experience. Prior to joining CIC Services, LLC, Shoshanna served as the Risk Manager for The Integral Group in Atlanta, GA. She created and managed the company’s corporate insurance program through individualized risk mitigation strategies within enterprise risk management, underwriting, claims management, property management, safety, compliance and regulatory reporting standards. She holds her Property & Casualty (P&C) Insurance license, participates in multiple professional insurance organizations and is a member of The Risk Management Society (RIMS).
