What Drives Insurance at its Core?
There is likely two primary paradoxical driving factors of insurance; fear of loss and trust.
Let me make the case for fear. Typically, all businesses and families will have loss at some point in time. Most people would agree it is not “if” but “when” this loss will occur. For example, most people lose their jobs in the 21st Century for often no fault of themselves… accidents, lay-offs, lack of proper training, etc… Another example is that we all know we will die… and yet we morn the loss of than other person and want our loved ones prepared for when we die.
We have consciousness, as humans, to time and happenings around us. Unlike all other mammals, we can plan and do plan for our futures. We remember, which brings joys and regrets of past events. Regardless of our station in life, not taking the extreme human dysfunctions into consideration, we “hope” into the future.
Because of this, we gather and store. This consciousness also brings awareness to the brokenness of the world around us and we begin to worry and maybe fear of particular events into the future where we lack control. Awareness without control brings levels of anxiety. If we have gathered and stored possessions, we want to protect those things and people.
Insurance wants to solve, resolve, or at least mitigate the concern, anxiety, or fear cause by this consciousness of “bad things happen” to us all. Insurance is entirely structured to reduce and recover from loss. There is no gain considered in insurance, like say an investment.
Here steps in “Trust” as the commodity of insurance. Insurance becomes the financial instrument that uses the “Law of Large Numbers” to smooth out losses for predictable and measurable events, financially. Insurance cannot reduce the actual loss often measured more in emotional and relational value but can soften the events financially. Since trust is critically important to insurance success, affinity groups regulate the promises and sale of insurance. Governments of all nations and states (domestically and internationally) regulate insurance to provide over-sight on the community of trust. Financial markets evaluate insurance companies on the “strength” of their financial statements to keep the insurance promises. Rating Agencies exist just to evaluate the ability of insurance carriers to fulfill their promises to owners of these promises. Why? Because when “bad things happen” we want to be able to trust our insurance providers to soften the loss from a financial perspective.
But financial instruments leverage trust. Banks and insurance carriers do not have 100% of their client’s deposits and promises held in cash waiting to make a payment. They leverage the “rules of large numbers” to keep more than enough when these catastrophes events occur. They leverage other insurance and banking relationships, assuming these events will not reach all insurance carriers equally. It is also why, governments set up insurance of last resource should a carrier come close to failure. This was demonstrated in the 2008-9 financial crisis when the US government bailed out banks and insurance companies… labeled “Too Big to Fail”. Other countries have also experienced such events as well.
So what does this have to do with Captive Insurance. Captive Insurance is an insurance company whole supporting a business or association group and their interest. That business likely understands its risk better than any other outsider, such as a large insurance carrier, so the captive insurance carrier will likely service the business needs better. That business should be able to trust itself equally or more than a large insurance carrier. This often is demonstrated where the business requires aligned interest with the captive insurance company unlike large insurance carriers that often just want to “pay-out” fraudulent claims.