Why Form a Captive
Generally, there are many benefits associated with captives. Some of the more common are as follows:
- Cost reductions
- A corporation paying an insurance premium to a conventional insurance company contributes to the expenses of an insurer (including inefficient administration and other insureds’ losses) and profits of the insurer. By establishing one’s own insurance vehicle, such costs and profits subject to control within the same economic family.
- Cash Flow Benefits
- A captive allows an owner to control the investment portfolio to which the excess premiums are applied. It also allows the money otherwise paid to third-party insurers to remain in the same economic family, unless claims are paid.
- Estate Planning
- Business owners with estate planning objectives may find that Captives provide many attractive options. Consultation with well qualified and trusted advisors is important to insure that your Captive structure meets necessary qualifications and requirements.
- Reinsurance is available to insurance and reinsurance companies only, and typical cost ratios associated with such reinsurance are far less than conventional “primary” insurers. By accessing a second tier of insurance products (through the establishment of a captive insurance company) a business can access a wider array of insurance products at more effective costs.
- Availability of Cover
- Certain types of coverages are unavailable or difficult to obtain, because of such things as historic loss experience for a sector or industry, such as medical malpractice. By setting up a captive, a business can insure such risks and obtain access to the reinsurance markets that may have greater appetite for a risk.
- Certain tax benefits may be available by utilizing a captive insurance company. Any tax benefits, however, should not form the reasoning behind the establishment of a captive insurance company.
- Risk Management and Underwriting Profitability
- Conventional insurance is typically provided on a guaranteed cost basis and there is little incentive to improve risk management, as there is no participation in the profitability of the insurance program. However, with a captive insurance company, the parent will benefit from good claims experience, and surplus in the company may be available to the parent by way of dividend. A captive can therefore provide great incentives to improve the risk management philosophy throughout an organization.
- Underwriting Stability
- A captive insurance company is less vulnerable to the cyclical nature of hard and soft markets that blight the conventional insurance market. A captive can aide a business that requires accurate financial projections.