A captive insurance company is essentially a private insurer that is a wholly owned subsidiary of another company. These captives accept the premiums that the company would have paid to a regular insurer and then cover any claims against the parent company. If the claims are less than the premium, the captive has made a profit, just as a regular insurance company would. The difference is that the company that set it up benefits, not the insurer.
This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured.
Financial Benefits to the Business Owner:
1. Can lower the cost of existing insurance coverage:
- Favorable underwriting experience
- Obtaining insurance at lower costs
– Insurance overhead and profit often account for 40% of premium
- Asset Protection
- Tax Benefits
- Estate Planning
- Transfer part of the risk
2. Can insure hidden risk or non-traditional risk:
- Creating a new profit center by writing unrelated or currently uninsured risks for profit
- Increase cash flow and investment income through tax and insurance expense savings
- Underwriting advantages –knowledge of business and experience rating
- Tax advantages
Establishing a captive insurance company is not feasible for all companies but, where appropriate, it can provide substantial tax and nontax benefits to successful shareholders and their families.