Captive insurance companies are created and controlled by the businesses they insure. This self-insurance is used to mitigate risks that cannot be or are difficult to insure, including product liability, litigation fees and malpractice. Any of the claims made against these businesses for their covered risks are paid by the captive, protecting corporate assets.
Captive insurance, including group captive insurance, has several tax benefits. For example, company premiums are not considered taxable income for the captive, but it is also a tax-deductible expense for the parent company. In addition, as the captive’s assets increase, they can be distributed to the company’s owners as dividends, which have a significantly lower tax rate than income.
Not only do companies accumulate (and protect) assets through captives, but they also reduce their costs. They have reduced operating and administrative costs for the captive. In addition, companies are able to tailor their coverage, so they are not paying for coverage they do not need. They determine their deductibles and incentives for loss control. Finally, they gain access to the reinsurance markets, which would have been unavailable without the creation of the captive.
Not only do captives provide policies that protect the company, but the underwriting process identifies corporate risks and their probabilities. This allows companies to create new processes that improve safety and reduce risk. As businesses focus on risk management, they reduce their premiums. This focus may then spread to other areas of the business, improving safety and risk throughout the entire company.
New Income Stream
Because captives are businesses, any company that starts a captive is actually starting a new business and entering a new industry. This process distributes corporate risk among industries. In addition, as they grow, captives can become full insurance companies, offering insurance services to clients outside the parent company and creating a new revenue stream.
Because of the capital investment requirement of captives, consider researching all your captive options prior to investing.