As businesses grow and become major brands that are well-known among the public, the risks faced by the enterprise also increases. Large corporations face many risks in their daily operations – even small errors or faults can result in serious lawsuits against the company. This is why risk management is such a crucial factor, but can also become confusing – especially for owners who do not have knowledge of the sector. Seeking out sophisticated risk management advice can help the business owner have a better understanding of the options.
An 831(b) captive structure is often advised. While the advantages of strategic risk management solutions that utilize a captive structure are easy to find, it should be noted that there are a few negative factors too.
The Possible Drawbacks Of A Captive
Even though the number of captives registered has increased by over 6,000 since 1980, there are still several companies that do not use the strategy. Sure, certain enterprises can benefit from a captive, but this does not account for every single scenario. We take a closer look at some drawbacks associated with this form of private insurance program management.
- The major drawback often lies with the company and its owners. A lack of expertise in the insurance market can result in havoc when implementing a captive without understanding how the process works. The enterprise owner should understand how to mitigate risk in commercial activities through a captive and have knowledge of the market in general before attempting to initiate their own entity.
- A long-term commitment is required when forming a captive – which is not something that certain business owners may be looking for at the immediate time. Thus, a captive may not be the best option if the owner is looking for a shorter-term solution.
- When the company does not have a strategic objective in terms of risk management defined, then they might also want to consider other solutions. The company owner needs to understand exactly what they are attempting to achieve through the formation of a captive – without this type of objective, it can be hard to set things in motion.
Captive insurance companies have both benefits and drawbacks when used as a security protocol for enterprises. Learning more about captive insurance best practices can help, but the business owner should also realize when an alternative solution might be the better option.