What is a captive insurance company?
Quite simply, a captive insurance company is a risk-financing tool — one that grants owners greater control (in both financial and risk management sectors) than that which is offered by traditional commercial insurance. Captive insurance involves setting up your own insurance company, to assert greater control over your risk management, tax planning, and overall earnings. With a captive insurance structure, you can make sure that your risks are written into policies as you see fit — without ambiguous or obscure wording, or using terms which strongly benefit your insurer at claims time.
Why form a captive insurance company?
For years, large corporations have benefitted from operating their own privately held captive insurance companies — most of which were originally established to provide coverage where insurance was unavailable or prohibitively priced. Such insurance subsidiaries were typically held in offshore accounts (you’ve no doubt heard about the tax benefits of keeping funds in the Cayman Islands).
Recently, smaller-scale and independent businesses have discovered the benefits of forming their own captive insurance company, which include such risk management elements long favored by the larger companies, as well as many attractive tax planning possibilities. But that’s not all.
There are many different benefits to forming your own captive insurance structure. However, such benefits may not apply to your specific area of jurisdiction, so consider the following options as general benefits.
Benefits of forming a captive insurance company
The price of insurance coverage purchased in the conventional market typically includes a significant markup to pay for the insurer’s acquisition costs (including marketing and broker commissions), administration, and overhead, not to mention profit to the insurer. The fact that premiums are paid in advance represents a lost opportunity to earn investment income.
The establishment of a captive does not eliminate such costs, but it certainly can reduce them.
Set your own goals
Traditional insurance markets tend to set prices as they relate to specific industries as opposed to a company’s loss history. When operating a captive, your industry trends and loss history are an important piece of the pricing of your individual policies, allowing you to buy insurance at a wholesale cost rather than at retail. Essentially, you are establishing your objectives while eliminating the processes responsible for inflating unnecessary overhead costs.
Gain greater access to insurance
A captive insurance company allows for a more customizable policy covering the specific risk of your business — and again, typically at a lower cost than traditional third-party insurers. Captives come with the freedom to tailor the particular terms and conditions in your policy, allowing for coverages that may not be commercially available.
While it is strongly recommended you consult with a tax professional before establishing a captive (there are areas of jurisdiction to consider), there are tax benefits available to certain businesses. For example, premium taxes otherwise payable in a commercial insurance program may be reduced if your captive qualifies as a true insurance company. To learn more about tax savings specific to your area of the country, consult a professional in your area. While tax advantages can be attractive, they should not be the primary reason for establishing a captive.
Is captive insurance right for you?
If you are still intrigued about the prospect of forming your own captive insurance company, including all of the aforementioned benefits, there are still a few items to consider. Typically, the ideal candidate for a captive is a business owner with a substantial operation that has significant uninsured or underinsured risks and is looking to gain greater control over insurance premium costs. Before making your move, you should assess the current insurance market and determine the availability of existing policies as they suit your business. You should also consider your current business operation — how high-risk are you? And how willing are you to take on risks that are not currently covered by standard insurance?
With all factors considered, if you believe you and your business could benefit from a captive insurance company, you should reach out for expert advice on how to go about setting it up.
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