Nearly four years ago, Bill Krause decided that his company was paying too much for property and casualty coverage. So he formed a captive insurance company that essentially gave his business ownership control over his insurance. Now, any premium dollars that aren’t spent on claims go back to his bottom line, and everyone in the company has a greater interest in keeping costs down.

“It would rank up there among the best decisions we have ever made,” said Krause, president and chief executive officer of Krause Gentle Corp., which operates the Kum & Go convenience store chain. “I would compare it to owning your home over renting it. With a captive, you are a shareholder, and you have a strong possibility of having part of that premium deferred into not only capital but profit.”

Krause is also chairman of his captive insurance group, which has over the past four years has taken on 32 partner companies that share in the risk and profits of providing their own insurance.

Krause’s group is one of eight captive insurance arrangements that have been organized in the past five years by Innovative Captive Strategies Inc. The West Des Moines company, an affiliate of Holmes Murphy & Associates Inc., was started five years ago to specialize in the captive insurance market nationally. In addition to its West Des Moines headquarters, the company also has an office in Pennsylvania, and has just opened an office in Vermont, which is the captive industry’s third-leading domicile.

“Our mission is to be the best captive consultant in the market, not necessarily the biggest,” said Dan Keough, ICS’s president. “We want to make sure that our companies in our captives become better companies.”

Captive insurance programs began in the 1980s, when some businesses began pooling their resources to form their own insurance companies in response to an overall tightening in the industry that prevented them from getting the coverage they needed. To reduce the costs of forming their own insurers, the captives are generally organized as an offshore company. Each of ICS’s eight captive entities were incorporated in either Bermuda or the Cayman Islands, two of the most popular offshore jurisdictions.

Over time, companies that form captives can generally realize between 25 and 30 percent savings in insurance costs, “if they do the right things,” Keough said.

The right things include taking an active role in the management of the captive company, Krause said.

“It’s absolutely essential that the CEO take ownership in the captive,” he said. “You’ve got to be involved; you don’t hand it to someone and ask them to run with it.

You run a better company because your focus is on risk management. You start to reward your employees not only for sales, but also for minimizing risk, such as workers’ comp claims.”

Similarly, his partners in the captive were hand-chosen for their ability to miminize risks, and the reinsurance company also conducts its own due diligence, he said. In Krause’s group, each partner also put down $25,000 in seed capital.

Good candidates for forming captive insurance groups are privately held companies that pay more than $300,000 per year in annualized premiums, Keough said. In the case of single-parent captives, normally the best candidate is a large company with annual premiums of $5 million or more.

Though tax savings are often touted as a reason for forming a captive insurer, it’s not the sole reason a company should form one, he said.

Substantial cost savings over time could be a very good reason, however.

The eight captives formed through ICS have collectively accumulated enough savings that they’re now actively discussing launching their own mutual fund to reduce the fixed costs of investing the funds their parent companies have paid in premiums, Keough said.

“We place roughly $35 million to $40 million into the market to invest from savings,” he said. “If we combined it as one portfolio, we could actively reduce fixed costs.”

The captive owners will consider whether to adopt the mutual fund concept at ICS’s annual conference scheduled for September, which is also an important component of the company’s role in education role, Keough said.

“We are the first captive consultant in the country to do a captive conference,” he said. “We spend a lot of time on educating.”

Earlier this month, the company hired Kate Westover, an industry expert on captive insurance, as vice president of its alternative risk financing services. She serves as an international business representative to Barbados, the Cayman Islands and other captive jurisdictions, and has written “Captives and the Management of Risk”, considered as the authoritative text in the industry.

As a business, ICS increased its revenues by about 30 percent last year, and since its inception has on average doubled its revenues annually.

“We want to be a $10 million company by 2010,” Keough said, and he expects the number of captives will probably double during that time.

“We could grow our company faster, but we are committed to growing our company the right way,” he said. “We want to be viewed as the leader in the alternative risk business, and I think we’re near that now.”