A common question we are asked from prospective captive owners is to “make a NON-TAX business case for captive insurance”. Surprisingly, we don’t get asked as often about captive insurance structure or captive insurance best practices. YES, we can easily make a business case for captive insurance. So if you’re a business owner looking to start a captive insurance company, keep reading to find out how you can make a non-tax business case for a captive insurance company.
The Advantages of Setting Up a Captive Insurance Company
Before we begin any discussion about making a business case for captive insurance, it’s first essential to understand the purpose. The primary purpose of captive insurance is to help enterprises with risk management.
Captive insurance companies offer uniquely designed solutions for enterprise risk and are useful for enterprise risk management. They are a formalized way for organizations to finance their risk. Captive insurance companies are becoming increasingly popular, as organizations have to rely on them more. Due to the COVID-19 pandemic, insurance premiums' price has continued to increase exponentially. At the same time, traditional insurance companies are starting to cut the coverage they offer.
One glance at captive insurance company statistics, and you will notice that over 90% of Fortune 500 companies have captives. The main reason why captives are so common among Fortune 500 companies is that they’re a great way to reduce the total cost of their business risk.
Additionally, a captive is an excellent way for organizations to invest any excess capital. Instead of leaving the organization's capital identified for risk ‘premium’, they can pay premiums for that risk into the company’s captive, which presents them with greater flexibility. Not only do they have the ability to finance their own risk, but they may also have more investment options available to them.
How Our Clients Are Using Captives
While the benefits listed above are a few general reasons to set up a captive insurance company, here are examples from a few existing captive insurance owners we surveyed on why they initially formed their captive insurance companies.
After reviewing the messages from a few different captive insurance partners, we were able to identify the primary reason behind clients starting captive insurance is mitigating risk in commercial activities. Captive insurance companies are a formal vehicle that organizations use to funnel out excess risk from their books.
Save On Group Medical Insurance
Employee benefits and group medical services are among the fastest-growing areas for captive insurance. The cost of medical insurance continues to increase due to systemic issues. That is why creating your own self-funded group medical insurance plan using a captive insurance company is a much better plan. With a captive insurance company, businesses can cover the employee’s medical benefits, provide a superior plan while saving up to 40% of the premiums charged by the traditional medical insurance providers.
Optimize Investment Strategy
Insurance companies tend to pay taxes differently than other businesses. They’re only taxed on their investment earnings. As a result, in a captive insurance company, many captive owners have the ability to choose long-term investments. They buy and hold long term financial instruments to get the most out of the invest return while minimizing the investment income to the captive.
Greater Control Over Insurance Policies
Another popular reason we heard from captive owners is they provide significantly greater control over their insurance policies. Traditional market insurance policies are written primarily by the Insurance Service Office (ISO), and they don’t really differ from provider to provider. The ISO is funded almost exclusively by the traditional carriers. The result of this is the policies purchased by businesses in the traditional market are written to favor the carriers NOT the businesses that purchase them.
On the other hand, going with a captive allows organizations to provide themselves with insurance coverage for the exact risks that they are facing. Instead of having to comply with the different coverage options that traditional insurance providers offer, they can write the exact coverage they need to cover the risk of their unique business and risk.
Access To Reinsurance
The forth most common reason when surveyed on why they chose to set up a captive insurance company was it gives them access to reinsurance. Reinsurance is essentially ‘insurance for insurance companies’. It allows captive insurance companies to decide how much risk they will take and how much they choose to offload to other insurance companies worldwide.
Buy Down Retentions
Another advantage that clients have after forming a captive insurance company is that it allows them to buy down their retentions. While the organization might already be taking a million dollars per claim, certain situations might want to divide the risk. That’s where the captive insurance companies come into the equation. The business can keep a certain portion of the liability on the corporate books and offload the remainder of the risk to the captive.
Centralize Insurance In One Place
Lastly, one of the most major reasons why clients choose to form a captive is that it allows them to place all their risks in one position. Instead of having many different brokers and insurance carriers, they can issue insurance from the captive and purchase reinsurance to control the liability of the captive insurance company.
There are several NON-TAX reasons business choose to form a captive insurance company. The existence of a captive insurance makes the business more profitable and appealing to third parties. Remember, since you can’t beat the traditional insurance marketplace, you might as well BECOME ONE.