From wildfires and hurricanes to rising health insurance costs, dealerships face a slew of business risks. One way to mitigate those risks is to self-insure.

Creating a captive insurance program isn’t right for every dealership, but for those that fit the profile, forming a captive allows for more control over a dealership’s insurance policies. And it can produce cost savings.

“A captive is a tool, or one way to look at financing your risk, because that's all insurance is,” Casey Fernandez, a client executive at global insurance company Hylant, says during the recent Transforming Risk Into Opportunity webinar hosted by the accounting firm Rosenfield & Co.

Captives are formed, he says, because a dealership figures it can beat the market in terms of how it controls that risk and, long-term, receive the underwriting profit an insurance company usually keeps.

A dealership or group with a lower-than-average claim history can recoup up to 40% of its insurance spend by forming a captive, Fernandez says.

A captive insurance company can also help a dealership craft a policy with the proper capacity to address specific issues.

Consider a business interruption policy for a dealership in Florida: To calculate lost business in the Sunshine State after hurricane season, most insurance companies want to look back over the past few months, says webinar participant Ken Rosenfield, founding partner at Rosenfield & Co.

But those are the months when sales are generally lighter in Florida, he says. The big sales haven’t come yet.

However, “in the wintertime in Florida, service departments are really rocking and rolling,” Rosenfield says.

The interruption insurance needs to look forward to a dealership’s busiest months, not backward to the slower months.

“That can make a huge impact on what your reimbursement is,” Rosenfield says.

Single Cell vs. Group Captive

In the insurance business, they say “if you’ve seen one captive, you’ve seen one captive,” Fernandez says.

Captive insurance can be created to cover a variety of risks, but the risk generally must have happened in the past, so an actuary is able to put a price on it.

Beyond that, there are group captives and single-cell captives.

Fernandez says a dealership should have at least $1 million in general liability coverage to form a single-cell captive.

Setting up the plan, including a feasibility study, will cost $75,000 to $100,000, he says.

For a single-point dealership or a group with a few rooftops that is only spending up to $250,000 on insurance, spending that kind of money to assess if a captive works “makes no sense,” he said. “The repayment of the benefit might be four, five, six years down the road. And that’s if you have a clean history.”

Another option is a group captive. Fernandez says the cost of entry for a group captive program is much lower than for a single cell.

A Group Captive for Health Insurance

JM&A recently formed a Health Captive Program as part of its JM&A Group Dealership Services. It is a group captive program.

“We feel like this gives dealerships control over the design and structure of their health care plan,” Bill Christie, director of JM&A Group Dealership Insurance Services, tells WardsAuto.

Its dealer partners asked for such a program, Christie says, because it provides them with more transparency into claims and greater flexibility in plan design.

The Health Captive Program allows for more predictive underwriting and potential cost savings of up to 30%, JM&A says.

The new captive is “employee-centric,” Christie says, with a lot of guidance and support for employees around scheduling care, including access to telemedicine.

To determine which dealer partners the health captive is right for, JM&A looks at a dealership’s employee base, Christie says. There must be a minimum of 75 employees “to have the conversation,” he says.

The group captive is right for dealerships with up to 1,000 employees, Christie says.

Beyond 1,000, dealerships are better off forming a single-cell captive insurance company, he says.

“We could do that as well,” Christie says. “We would create another cell within our program for them specifically.”