How to Avoid Padding the Pockets of Insurance Companies

Insurance if one of the best businesses in the world when done right. There is a reason that Warren Buffett, the smartest investor / businessman ever, has the most important piece of his company, Berkshire Hathaway, in insurance. People will pay, and rightly so, a lot of money to protect themselves from risks that could destroy their financial situation for the rest of their life.

So, what is the point of it? The point of insurance is to pool risk so that a group of people pay small amounts to cover large individual claims. Some come out ahead on what they pay in, most don’t. However, by having insurance you avoid the very small potential that certain things could happen that could wipe you out financially. As risk avoiders we are happy to part with a small amount of money to protect against a very large payment if something bad happens.

We all need insurance, right? Well, kind of. Many businesses/business owners are in a financial position to effectively “self-insure”. Self-insurance is just what it sounds like, you take on the risk rather than paying the insurance company to take on the risk. Now, of course not every business is in the position to do this. You need to have set yourself up nicely.

If you are in this position, meaning a large insurance loss would not wipe you out, in many cases it can make sense mathematically to pay yourself those premiums, save them up, invest them, and one day make the pay-outs if claims arise. And in fact, there are ways to do this.

The most practical and tax efficient way is to set up a captive insurance company…one that you own. You take on the risk, you pay yourself the premiums, which is a deduction and you run the insurance company with a small staff. This shifts exposure to that company and profits from your business to another company.

Now of course the insurance company must be properly capitalized to take the expected losses and you must run it as a real business, but the net profits of not paying the insurance company, and running your company efficiently, can be a real net positive financially.

This type of company is not for everyone, or even most businesses, but for higher net worth owners and successful businesses it makes more sense to be the insurer than pay the insurer.
Give us a call to discuss further if you think it could make sense for you.

 All the best,
Your Fortis Capital Management Team