Captives - A 3 Part Series in Alternative Risk Insurance
A captive insurance company or “captive,” is a legally licensed, limited-purpose property and casualty insurance company. A captive’s main business purpose is to insure the risks of its owners or the companies affiliated with its owners. A captive insurance company can recapture the profits that are currently going to your insurance carrier, customize coverage to meet your needs, achieve significant tax benefits, and create greater flexibility in estate planning. One of the main benefits of a captive is custom tailoring insurance policies to cover your specific risks in ways not available in the general commercial insurance marketplace – and to cover risks where there is no commercial insurance available. The advantages a business may enjoy as the result of the formation of a captive are:
- Improved Risk Management and Risk Financing: A captive insurance company can be a highly effective tool for gaining better control of an organization’s risk-management and risk-financing functions. A captive can enhance the overall organizational view of risk management and provide valuable ways to identify and quantify risks
- Lower First-Dollar Insurance Costs: Another common misconception about captives is the belief that their primary use is to replace existing commercial coverage. This is true in some situations, but more commonly, the captive is used to augment existing commercial insurance, especially by providing first-dollar coverage for losses
- Plugging Gaps in Commercial Insurance Coverage: Every company has gaps in its insurance coverage, forming a captive allows businesses to plug gaps in their commercial policies by writing coverage the conventional market is unable to offer.
- Gaining Access to the Reinsurance Market: Because a captive is a fully licensed insurance carrier, it generally is able to gain direct access to reinsurance providers that underwrite the captive’s risk. This access spares the company commissions and profit margins that are built into the process when reinsurance is attained through a commercial carrier.
- Added Estate Planning Flexibility: Another often-unrecognized benefit of a captive is the opportunity to transfer capital and value to a new generation of owners.
- Creating a Profit Center: A captive can also offer a company the opportunity to generate additional profits by diversifying into the open market to offer insurance coverage to unrelated customers.
Single Cell/Parent Captives: The single parent captive is still the most prevalent structure in use today. Its usual purpose is to provide some risk transfer or financing for a corporation on a specific line of coverage. It is an effective alternative to traditional insurance when organizing the financial risks of a commercial business.
Group Captives: A group captive is formed by a group of individuals or entities that come together to jointly own a captive insurance company. Industrial insured group-owned captives typically insure only insureds in the same industry group, or with homogeneous risk, which creates group buying power and other risk management efficiencies.
Rental Captives: A rental captive is a captive insurance company that can be used or "rented" by unrelated insureds. It allows insureds to gain the benefits of a captive insurance arrangement without actually participating in the captive insurance company's ownership or management. Generally, the sponsors that own a rental captive do not take on much risk. They are only charging a fee for the use of their capital and for organizing and operating the captive. Rental captives can be structured to allow risk sharing among the participants, or they can be structured with no risk sharing at all. Where there is no risk sharing, participation in a rental captive facility can be like purchasing insurance from a commercial insurer.
Captives are sophisticated risk management tools that may significantly reduce premiums, provide additional insurance coverage and reduce a businesses’ taxable income. Deciding on the best captive for your company is a complex decision that requires thorough preparation and expertise. Contact Jordan Markuson to explore your options today.
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