A
captive is a closely held insurance company whose
business is owned by the insured and funded by the
owner's risks. A captive provides a business with
greater control of underwriting, investment and
operations decisions. There are two types of captive
insurance companies. They include the pure captive,
wholly owned by one parent and its affiliated companies
and the group captive owned by a small number of
unaffiliated entities. The group captive usually
includes companies who share similar business exposures.
Captives can be used to provide either direct coverage
or as reinsurance for a fronting company.
Financial
The
following financial benefits offer reasons for
organizations to look to the captive structure as an
alternative to purchasing insurance from conventional
markets:
Tax
Benefits:
The
captive allows its parent to earn investment income on
unpaid loss reserves.
Underwriting
and investment income may be accumulated free of income
tax in an offshore captive depending upon the source of
the income and the residence of all or some of its
shareholders.
Premiums
paid to the captive may be tax deductible as an ordinary
and necessary business expense.
Cost
Reduction:
The
captive owner benefits from paying premiums that reflect
its individual loss history rather than premiums derived
from industry losses. This reduces the impact of
industry trends and underwriting price cycles and
therefore reduces the total cost to the owner.
The
captive provides a means of reducing the overall cost of
risk management while providing the organization with
increased control over cash flow. A captive whose own
loss experience and claims management costs are no
greater than the average insurer, may enjoy significant
underwriting profits. Such a captive owner may avoid the
added costs associated with insurance purchased in the
conventional market. These costs include acquisition,
overhead and profits totaling as much as 40% of the
premium.
Insurance
The captive structure provides its owners with a greater
amount of flexibility and control over the risk
management function. A captive can be designed to
respond to specific coverage, unique insurance needs and
a variety of premium and retention requirements.
The
following insurance benefits provide additional
incentives to the potential captive owner:
Risk
Management Process- Owners are able to improve the
risk management process by having centralized financial
and administrative control in the captive structure. The
captive is a vehicle for the insured to focus on their
specialized coverage needs facilitating development of
other risk management areas such as loss control.
Reinsurance-The
captive provides access to the reinsurance market
allowing the individuals or parent organization to obtain wholesale premium quotes.
The coverage and reinsurance program can be tailored to
meet the specific needs of the insured.
Coverage
Options- Captives may be used as vehicles for
funding self-insured exposures. Wherever coverage is
either completely unavailable, available at a high cost
or available subject to a policy containing burdensome
terms and conditions, a captive may serve as a promising
alternative to conventional placement.
With
the changes occurring in the traditional insurance
marketplace, some questions that you should be asking
are:
Is
a captive insurance company or another form of
alternative risk finance appropriate for your company
and risk management needs?
What
steps do you need to undertake to make this
determination and begin establishing a captive insurance
company?
We
have over 28 years direct experience in the field of
alternative risk financing including captive insurance
company formation. Please call us for a free
consultation regarding your needs.
