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

Reduce costs

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.

Tax advantages

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.

Life is full of risks: learn how to make the most of them by getting the right business solutions and tools on your side.

If you’re thinking about forming a captive insurance company, there’s a good chance you’ve read accurate and inaccurate information about captive insurance law and captive insurance best practices. Such is the nature of the internet.

In this quick guide, we’re going to cover a couple of myths about captive insurance companies that may have kept you from considering them as part of your own business.

5 Common Myths of Captive Insurance Companies

There are likely even more myths about captive insurance companies out there, but these few tend to be the most prevailing in terms of misinformation.

1. If I Have Traditional Insurance, I Don’t Need a Captive Insurance Company

This is an extremely common myth that can be easily debunked.

The way we start out with clients is we get copies of all of their existing insurance portfolios or insurance policies. Then, we go through all of those policies and we give the client a report that says what is included in their insurance and what is excluded from their insurance.

When you go through an insurance policy, there may be ten pages of information that’s included and thirty pages of stuff that’s excluded, no matter how good your insurance portfolio is and your insurance advisers are. There are certain things insurance companies just don’t want to cover. Those excluded items can be put inside your captive insurance company. The result is better coverage with a more well-rounded insurance portfolio.

2. Captive Insurance is a New Thing

This couldn’t be further from the truth. Captive insurance is not a new concept in any stretch of the imagination. We’ve had them in the United States for over a hundred years, and they’ve existed globally for far longer.

The majority of the captive insurance companies that have been used in the past were located in offshore jurisdictions, such as Bermuda, the Bahamas, and the Caymans. These are the common jurisdictions that people think about, but it seems like every day a new jurisdiction pops up here in the United States. So now, there’s over thirty-two jurisdictions here domestically that do captive insurance companies.

When it comes down to it, captive insurance structure’s visibility has simply just increased in the United States. Captive insurance companies have been around for a long time.

3. The Captive Insurance Marketplace is Small

It’s important for those interested in captive insurance to understand that the marketplace is not small by any means. In fact, it’s estimated that over 50% of the insurance marketplace globally is put in a captive in one way, shape, or form in some sort of alternative risk structure.

So, it’s actually very large. And there are over 8,000 captive insurance companies globally. It’s estimated that companies like Verizon, Nike, and U.P.S. have close to $2 trillion in offshore captive insurance jurisdictions to protect their businesses in the event that claims appear down the road.

4. Only Large Enterprises Benefit From Captive Insurance

As a curious potential client who Googled information about captive insurance companies, it’s likely that you’ve come across a lot of descriptions of captive insurance companies as common choices for large corporations. It’s also a common myth that captive insurance companies are only started by enterprises that own multiple businesses and operate globally.

In the case of single-member captive insurance companies, it is common for them to be formed by very big businesses. However, this isn’t always the case and doesn’t ring true for multi-member captive insurance companies.

Group insurance captive companies (also known as pool captives) are generally created in order to join together smaller businesses for the purpose of gaining insurance negotiation power.

And when it comes down to it, a business’s size or profits don’t matter at all when it comes to considering captive insurance. It’s all about the relative scale of your company’s business insurance premiums. If you’re paying over $100,000 each year in insurance premiums a group captive insurance company could be an excellent decision.

5. If You Have a Captive, A Single Large Claim Could Destroy Your Business

Wrong again! This myth can be debunked with just a single term: Reinsurance.

If you operate a one-member-only captive insurance company or are part of a larger group captive, a portion of your investment is going to be in reinsurance for the sole purpose of preventing such a dangerous scenario in the case of substantial coverage events.

A reinsurance policy will properly prevent surprise claims, as well as claims that are substantially bigger than expected, from destroying your company’s strength in the long term. Just being a group captive partner will ensure this, as reinsurance is part of all captive insurance company programs to protect its captive management partners.

While the advantages of strategic risk management solutions are worth taking additional steps to protect your captive, reinsurance takes care of most of the risks.

Owners of businesses, entrepreneurs, and stewards of large organizations are always looking for effective ways to cut down costs while improving performance. Enterprise risk management is one aspect of an organization that gulps a large amount of the costs in an organization. It is wise for companies to seek for uniquely designed solutions for enterprise risk.

We advise our clients to do risk transfer by creating captive insurance structures that can mitigate risk in commercial activities. Apart from reducing how much is paid as insurance expenses, captive insurance arrangements are typically deductible, which means that organizations can have access to larger annual deductibles.

It is common for small firms or even individuals to wonder why the cost structure of a large corporation is usually lesser than what should have been obtainable. This is because smart firms are now using private insurance solutions created by their captive management partners like us. They tend to enjoy the advantages of strategic risk management solutions while improving their performance.

Any organization that has tested the private insurance program management of captives won’t want to go back to using conventional insurance coverage.

Reasons Your Company Needs A Captive Structure

When your organization has a captive insurance structure, it means that it has its own insurance company that handles its risk management.

An organization that keys into owning its insurance vehicle, tends to save up on agent commissions, marketing, ads, and so on. These could translate to massive savings, which can be used by the organization that owns the captive structure.

Apart from that, owning a captive insurance platform means that you are able to protect your company from paying a lot to have access to coverage for those risks that are considered expensive by conventional insurance firms.

Another reason many companies are embracing this structure is that they are unable to get unique coverage for some types of risks from conventional insurance companies. Owning a captive structure is a win‐win for any company that knows its onion. What the company needs to do is to partner with astute captive management partners like us to customize solutions for their risk needs.

Benefits That Will Accrue To Your Organization Under The Captive Arrangement

• The parent company will have access to tax deductibles on the insurance premium that was given to the captive structure.

• The organization will have access to a lot of tax savings benefits. The parent and the captive will have access to income tax savings, which many organizations crave. Apart from that, the shareholders can embrace the benefits of gift and estate tax savings.

• The organization will be given the leeway to garner wealth by using a captive. For those organizations that want to protect their assets, the captive may be the right for them.

• We advise our clients to use the captive system because distributions can be given to them at favorable income tax rates.

• One thing every company wants is to have their assets protected against the claims from either personal or business creditors. When a company uses our help to create a captive structure designed for itself, it stands to gain this.

• An organization that uses a captive structure tends to pay far lesser in premiums compared to its counterparts that do not.

• When our clients use a captive structure, they can benefit from the reinsurance market that costs next to nothing.

• Some organizations are unable to get proper insurance coverage for some risks. The captive structure offers them.

• The organization has access to underwriting flexibility. When a captive structure is opened, marketing costs, advertising costs, overheads and other types of costs are saved as types of underwriting profits. These profits can then be used by the organization that owns the captive structure.

• The organization will have access to increased coverage. The truth is that a lot of traditional insurers do not offer the specialized and intense coverage that some companies need. The coverage that they may offer may scratch the surface at best. A captive structure will offer your company a better coverage compared to conventional insurers. Our feasibility analyst team will look at your business structure and seek for the right captive structure for your organization.

• Your organization can make purchases based on need. Instead of taking out a conventional insurance coverage that is not needed for one reason or the others, a captive structure allows companies to use only what they need.

• Utilizing a captive insurance structure means that organizations can look at their risk exposures. They can find out what is making them lose money.

It is then easier for them to adopt better risk management techniques.

Conclusion

Different organizations may need a captive structure for one reason or the other, but the different reasons usually boil down to one. They want to clamp down on their cost centers. We can help your organization create the right captive structure based on its needs.

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