Captive Insurance is an Alternative Risk Transfer solution that allows a business to own its own insurance company and fund their own losses. Captive Insurance Programs act as a conduit for businesses to transfer risk, especially for businesses that are underserved by the traditional insurance market.
Captive Insurance solutions represent a way for business owners to have the insurance protection they need while simultaneously helping to manage risks and expenses. Large, multinational corporations have used Captive Insurance for decades, and now smaller companies are able to take advantage of the benefits as well.
Benefits of Captive Insurance include:
- Allows stability, and potentially reduction, of insurance costs.
- Many reinsurance facilities only work with other insurance companies, but a Captive gives you cost-effective direct access.
- Eliminates the cost of the traditional insurance company’s overhead and profit.
- Acts as a tool to allow for a more efficient allocation of costs in a way that is difficult through simple allocations.
- Your Captive can provide your business(es) with fully customized responsive insurance coverage.
- Allows you to get insurance coverage for unique or specific situations where the traditional commercial insurance marketplace is inefficient, limited, or non-existent.
- Since the Captive is owned by the insurer, the transparency in claims history and claims management is far better than in the traditional insurance market.
- Gives you control of insurance premiums and services in a much more effective way.
- The use of a Captive allows an insurer to embed a robust and proactive approach to risk management.
- Gives the insured the ability to track loss performance through the income statement of the Captive.
- Allows the insured to reserve for risk exposures that don’t meet the all events test.
- A Captive is a new stream of revenue; all insurance companies exist to earn a profit, including Captive Insurance Comapanies (CICs).
- Able to retain profits based on claims history and asset accumulation; premiums paid into a Captive that aren’t paid out in claims and expenses are returned by the Captive as net underwriting profit.
- Investment income can be earned on net underwriting profits.
- The insured is able to borrow back reserves and capital from the CIC, improving cash-flow timing and investment returns.
- CIC profits can accumulate over time to substantial sums, which can be paid out to the owners as taxable dividends.
- CIC’s commonly provide a more efficient tax structure in addition to providing many tax benefits that are not available through any other solution or strategy.
- Excess reserves paid out as dividends are taxed at long-term capital gains rates, essentially converting ordinary income into capital gain.
There are Six Different Types of Captives:
- Single Parent Captive – Formed primarily to insure the risks of its parents or affiliates.
- Association Captive – Formed by a trade, industry, or service organization to insure its members.
- Group Captive – Formed to insure the risks of multiple related or unrelated companies.
- Agency Captive – Formed by insurance companies to reinsure a portion of their clients’ risks.
- Rent-A-Captive – Formed to allow captive “benefits” access to companies who wouldn’t have access to those benefits otherwise.
- Protected/Segregated Cell Captive – Formed to allow for the segregation of assets and liabilities among different cells and their parent, each of which must individually meet the definition of an insurance company.
Please contact us to answer any questions you might have or to obtain a quote for you or your board. We have included some actual claims to show the many different exposures you may have as board member.