What is Captive Insurance?

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.