Captive insurance company. Sounds pretty cool. And, back in the 80’s, it was a critical juncture for us. We were a small provider of medical products. And, our product liability insurance was running 3% of sales- and growing fast.
So, a bunch of us smallish firms met together and investigated the concept of starting our own captive insurance company. No, we weren’t going to do it alone. We were going to lean on the experience and knowledge of Marsh Mac (Marsh & McLennan)- one of the biggest and best risk management firms out there.
We set up the corporate structure and determined how risky each of our ventures was. We anted up a good chunk of change (I seem to recall the number was $ 50,000 apiece) to insure we had adequate capitalization. We all agreed to employ one of two legal firms, with whom we contracted special rates, should we ever have a liability case against us. And, we visited each other to insure (via safety and liability audits) that we weren’t put anyone else at undue risk.
It was complicated. But, it was the right move. Our liability insurance costs were now manageable. This captive started out with its headquarters in the state of Maine, because that was the best state for our structure. But, after a while, we relocated the business off-shore. (This was before the IRS thought that off-shore businesses were tax shelters. I admit it- the taxes on our now-offshore insurance business was pretty low, another way we could keep our insurance rates very reasonable.)
But, that’s not the way these captive insurances work now. Because now these captive entities are arranged to rip off the public, to put them at risk.
Tomorrow, I will explain how these new entities are ripping us (the public) off.
