Do you have the right insurance for your business? Here's how to understand your options

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You probably have traditional professional insurance. But when it comes to protecting your business against a myriad of outside threats in today's complex and ever-changing environment, is traditional insurance enough or even the right solution?

With the insurance market getting tougher and premiums expensive, this is a timely question, especially as more and more companies look to other risk transfers. And an increasingly trending option is captive insurance, as globally more than 100 captives were formed in the last year, as Business Insider reports.

Related: 4 Ways to Protect Your Business Against Inflation

Context of traditional and captive insurance

Traditional insurance has built up a portfolio of offerings and coverage options for businesses. Some components of traditional insurance include risk spreading, premium tax deductions, and many general insurance coverages such as general liability insurance, business income insurance, and accident insurance work.

Captive Insurance is a wholly owned subsidiary that exists to protect your business against unique threats and provide the dynamic, unique plan your business needs. Captive insurance may be right for your business if it cannot get the insurance coverage it needs in the traditional insurance market.

For example, business interruption insurance is coverage that protects your business against disasters such as floods and earthquakes. This coverage does not, however, protect businesses against fire or tornadoes - and to activate this insurance, there must be an event that "triggers" your policy.

Businesses that closed during the pandemic lost money while they were closed, and they had to be completely closed to trigger their business interruption policies. With captive insurance, however, businesses can access their stored cash reserves and cover losses during extended partial outages that are not covered by a traditional insurance policy. Unlike this policy language with its many coverage exclusions, captive policy language is designed to protect the business owner.

Captive insurance also does not penalize bad behavior by other companies, and the cost you pay for insurance is not based on claims filed by other similar companies. Other considerations for possibly moving away from traditional insurance are premium hardening and companies looking to have cheaper coverage.

With this in mind, companies that want more control over their current insurance coverages and programs can tailor a tailored insurance plan based on their company's unique risk profile with their captive plan.

Related: How Companies Can Navigate the Dangerous Waters of Trade Wars

Bounties are not a sunk cost with captives

High premiums with traditional insurers can subject your business to higher monthly rates and leave your business feeling the impact of these high expenses. With captive insurance, however, your business can retain profits when claims go unpaid.

These retained earnings also provide tax deferral on loss reserves, allowing for the accumulation of a larger pool of funds for investment or unforeseen financially impacting situations such as litigation. These funds can also be used to protect your business against losses in the event of an economic downturn or difficult tax situations.

For a small business, this can help with scalability, as the expensive premiums paid with traditional providers can mean less money spent growing your business. Plus, as your business grows in size and needs, the coverages needed to keep your business properly protected also increase. How...