As a business grows and matures, its owners may look for additional means to grow revenue, boost profits and accumulate wealth. Vertical integration is a common approach and includes forming or acquiring a second business that serves the core business. Vertical integration works because the supplier or service provider is already making a profit serving the core business.
As an example, a manufacturer may choose to purchase or start a business within its own supply chain. Not only does this give the manufacturer greater control of its supply chain, it also enables the manufacturer to earn additional profits. Another benefit is that the business owner may gain better control of his or her risks, including the risk of a key supplier folding or choosing to sell to a competitor.
Vertical Integration – What Is A Good Place To Start?
A successful business can turn its risk management into a separate business, so that it functions as an additional profit center. Vertical integration of risk management and insurance can be achieved by owning (all or part) of a captive insurance company (CIC). A CIC can form the chassis for an Enterprise Risk Management (ERM) program. Captives are also an Alternative Risk Transfer (ART) vehicle.
Captive Insurance Companies enable business owners to earn all or a portion on insurance profits. They can also help control or eliminate commercial insurance expenditures.
CICs can be utilized to:
- Replace commercial insurance
- Insure enterprise risks
- Provide health insurance to employees
- Insure warranties
- Issue performance bonds
- Any combination of the above
What Is A Captive Insurance Company?
Simply put, a captive insurance company is a real insurance company. It is a C corporation and is licensed and has a domicile (home) like any large insurance company. Captives also have their own loss reserves, policies, policyholders, and claims. Owning a captive insurance company is a sophisticated way to self-insure, and captives are generally formed to insure the risks of a business, group of businesses and related or affiliated third parties.
What Are The Benefits Of Vertically Integrating Insurance Into Your Business?
Premiums paid to commercial insurers are a sunk cost. Also, many businesses experience very good loss histories, and still see their commercial insurance rates rise. Vertically integrating insurance by owning a captive insurance company can provide the following benefits:
- Lower commercial insurance expenditures
- Control insurance costs
- Insure risks that are difficult to insure in commercial markets
- Keep insurance profits
- Experience favorable tax treatment
Vertical integration… it isn’t just for suppliers anymore.