Definition of Captive Insurance Companies

Captive insurance companies are those which are founded for the purpose of financing risks which flow out from their parent groups, which may in some cases also include insuring risks associated with the parent groups’ customers. The use of captive insurance companies is a risk management strategy that a business uses as the basis of the formation of a subsidiary insurance company. Captive insurance companies are owned by their insured. The owner has control over claims, coverage and cost of risk.

Benefits of Captive Insurance Companies

Increase in Profits There are several benefits to the formation of a captive insurance company. It assists the parent company to increase profits while protecting assets. Risks which are not covered by commercial insurance can be insured, preventing income loss. Premiums generated by commercial insurers are structured to cover the overheads and profit margin of the insurer. Rather than paying a third party, the owner can preserve profits by keeping them within the captive. The owner is able to refrain from subsidizing commercial insurance companies that would use its premiums to cover external claims.

Quicker Claims Payment
Claims management is quite streamlined when captive insurance is involved. This is because the procedures of claims handling can be ordered by management, which reduces delays and bureaucracy often associated with commercial insurers’ claims handling procedures.

Lower Capitalization
A number of other advantages are presented by the founding of captives. One is that they can be established off-shore with lower capitalization requirements (allowing captives to be founded for less), and these may opt to be taxed as U.S. corporations. The premiums that are paid to the captive company may be eligible for tax deductions. Tax-free premiums can total CURRENT_PREMIUM_CAP million annually.

Lower Taxes
In a captive insurance companies scenario, not only are profits retained which would otherwise be lost to commercial insurance companies, the profits can also be taxed under the heading of dividends. Investments may be recouped at capital gains rate. Aside from asset protection opportunities, captive insurance companies also create wealth transfer opportunities. Premiums can also be reduced via risk management.

Another advantage of captive insurance companies is flexibility. In a soft market, a captive can capitalize on low rates by choosing to take a substantial proportion of risks and reinsure them. This allows the reserve base of the captive to increase, due to the availability of reinsurance at reduced cost. As the market hardens, the captive can keep a greater proportion of its risks.

Capstone is the leader in onshore and offshore captive formation and management. We are available to answer your question at WEB_TEL. Our experts hold free monthly captive insurance webinars and you can sign up to attend an upcoming session by completing the form below.