With the ever-changing dynamics of the business world today, the aspect of managing risk has become more vital than ever. While conventional insurance groups can take care of merely potential losses, more and more companies see value in captive insurance as a reasonable, smarter, and cost-effective method of risk management says Charles Spinelli. But what exactly is a captive and how it can be beneficial for a business? Keep reading to explore more.
What is Captive Insurance?
Captive insurance has come up as an alternative to a self-insurance entity wherein a parent company or a group of companies form a licensed insurance company to provide coverage for itself/themselves. The whole idea of doing so is to bypass using traditional insurance companies, which may not address the unique needs in terms of risk factors of the company and often exhibit a fluctuating price. Captives aim to be more flexible, customizable, and affordable, allowing business to manage their insurance requirements effectively.
Depending on the nature and size of a business, captives can be formed in different ways. While the most common form is a single-parent captive which serves specifically the needs of the parent company, another option is a group captive, in which multiple businesses pool their resources with the idea of sharing insurance coverage.
Key Benefits of Captive Insurance
- Cost Savings: One of the most appealing reasons for setting up captive insurance lies in its potential to offer the parent company considerable cost savings. By establishing their own insurance carrier, businesses can bypass paying exorbitant premiums for coverage charged by commercial insurers. Captive owners benefit by keeping the underwriting profit and the profits from invested capital that would otherwise be earned by standard insurers. This can provide substantial savings down the line.
- Greater Control and Flexibility: With a captive, businesses can have a better position to exercise control over their insurance policies, coverage limits, and claims management. The captive allows them to tailor the coverage options according to their risk profile as a parent company. It thus enjoys the essence of customized handling of claims as well as risk mitigation responsibilities to the company.
- Improved Risk Management: Captive insurance encourages business entities to be more careful and proactive in controlling their risks. Because the company has a vested interest in mitigating its claims, it tends to adopt more effective risk management measures to defend against possible accidents and losses says Charles Spinelli. Captive insurance encourages businesses to be more disciplined and proactive in managing their risks. Captives can also offer unique incentives for businesses to improve their safety protocols, which can further lower overall insurance costs.
- Access to Reinsurance Markets: being a wholly-owned subsidiary, captives can have easy and direct access to reinsurance markets. This often allows them to spread risks more efficiently or obtain better coverage terms. As a result, captive owners can expand their ability to handle large risks while controlling costs. This opens avenues to spreading the risks over multiple parties and enjoying cost savings.
- Tax Benefits: Captives are eligible for favorable tax treatment in most jurisdictions. Premiums paid to a captive insurance company may often be deductible as business expenses, and the income derived from the captive may also be taxed at a much lower rate than traditional insurers. Captives therefore become very appealing to the bigger companies looking to maximize their tax efficiency.
Is Captive Insurance Right for A Business?
Captive insurance is not for everyone. Forming a captive is a massive investment in terms of capital and time involvement. In particular, big companies in industries characterized by high risk, like healthcare, manufacturing, and transportation, have captive insurance companies because their cost of insurance is very high. Companies with solid financial performances and can afford resources to manage claims and underwriting duties would also benefit from captive companies.
To conclude, although captive is not an ideal choice for every company, it can be a powerful tool for businesses seeking to undertake more constructive and strategic approaches to mitigate their risk exposure.
