A common question prospective captive insurance company owners ask us is to “make a NON-TAX business case for captive insurance.” Surprisingly, we don’t get asked as often about captive insurance structures or 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 to make a non-tax business case for a captive insurance company.
Primary Purpose and Market Context
Before discussing 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 helpful 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 have 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 shows 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 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, giving them greater flexibility. Not only can they finance their own risk, but they may also have more investment options available to them.
How Our Clients Are Using Captive Insurance
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 about why they initially formed their captive insurance companies. After reviewing the messages from several captive insurance partners, we identified the primary reason clients started captive insurance as mitigating risk in commercial activities. Captive insurance companies are a formal vehicle that organizations use to funnel 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 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 and provide a superior plan while saving up to 30% of the premiums charged by 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 insurance company owners can choose long-term investments. They buy and hold long-term financial instruments to get the most out of the investment return while minimizing the investment income to the captive insurance company.
Operational Benefits
Another popular reason we heard from captive insurance company 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 don’t differ from provider to provider. The ISO is funded almost exclusively by traditional carriers. The result is that 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 insurance company allows organizations to provide insurance coverage for the exact risks they face. Instead of complying with traditional insurance providers' different coverage options, they can write the same coverage they need to cover the risk of their unique business and risk.
Access To Reinsurance
When surveyed about why they chose to set up a captive insurance company, the fourth most common reason was that 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 clients have after forming a captive insurance company is that it allows them to buy down their retentions. While the organization might already take a million dollars per claim, certain situations might want to divide the risk. That’s where captive insurance companies come into the equation. The business can keep a portion of the liability on the corporate books and offload the remainder of the risk to the captive insurance company.
Centralize Insurance In One Place
Lastly, clients choose to form a captive insurance company because it allows them to manage all their risks in one place. Instead of having many different brokers and insurance carriers, they can issue insurance from the captive insurance company and purchase reinsurance to control the company's liability.
Making the Business Case
There are several NON-TAX reasons businesses choose to form a captive insurance company. The existence of a captive insurance company makes the business more profitable and appealing to third parties. Remember, since you can’t beat the traditional insurance companies, you might as well BECOME ONE.
Find out if a captive insurance company is the right fit for your business.
Take the assessment to learn more:
https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment
