Reasons to Consider an Insurance Captive
Cost Control – Without a captive, a company may experience rising insurance premiums from the commercial market because of losses by other firms in its category. With it, a company can charge itself a premium based solely on its own historic loss experience.
Assured Coverage – Medical malpractice and other industry crises have caused many commercial insurers to drop whole states or lines of coverage. Many entities, such as physicians’ groups, can band together to form a group captive to effectively replace/complement the commercial market.
Access to the Reinsurance Market – A captive insurance company has direct access to the wholesale insurance market. Because reinsurers have lower operating costs and regulatory barriers, they can often provide coverage at lower rates.
Improved Claim Processing – With a captive, an entity can outsource claims administration to experienced Third Party Administrators (TPAs). It can then build its own historic claims database, for better record keeping and future loss estimates.
Potential Tax Savings – Forming or joining a captive may open the door to tax advantages only insurance companies can access.
New Profit Center – A captive can also be used to insure the third-party risks of a firm’s customers, vendors, or franchisees. If managed properly, insuring unrelated risks could become a significant new profit center.
Captive Myths
Captives are a Substitute for Commercial Insurance – When insuring in a captive instead of insuring with commercial insurers, it is just retaining risk in another fashion.
Captives Save Money – It is not accurate to compare retaining risk (captive) to transferring risk (buying insurance). Paying premiums to oneself is always cheaper than paying premiums to the insurance company in the long run.
Captives are Tax-Driven Schemes – There are some tax benefits. Most captives, if they have elected to be an insurance company, can accelerate tax deductions for incurred losses as opposed to just getting deductions for paid losses.
Captives are for Everyone – There are costs and time commitments to running a captive. The premiums developed, commitment to loss control and a desire to have more control of the process all need to be considered.
Captives Arise in Hard Markets and Fall in Soft Markets – Captive formation does accelerate in hard markets. However, the numbers of captives have grown every year. Regardless of market conditions, captives continue to offer more consistent insurance budgeting over time.
In short, a captive insurance company is a fully licensed insurance company owned by the business, its owners or related parties. It is also a unique insurance company and includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk. Captives are generally formed to insure (primarily though not exclusively) the risks of one or more businesses owned by the same or related parties.
If you think a captive insurance policy could be the right fit for your business, reach out to Oxford Risk to discuss more.