5 Reasons To Form A Captive Insurance Company

reasons to form a captive insurance company

A captive insurance company can be a great way for companies to handle the financial challenges of navigating the modern marketplace. Built around the concept of self-insurance, there are many ways companies are using these organizational structures to their advantage. 

In the following article, we'll be discussing the reasons to consider starting one as well as some of the potential drawbacks to guard against. But first, let's look at the inner workings.

How Captives Work

Captive insurance is a creative solution for companies that might be struggling with controlling insurance costs and mitigating risk. These companies are not the same as traditional insurance. 

The parent company sets up their captive separate and apart to operate as an independent business. It underwrites claims, charges deductibles, and collects premiums just as a regular insurer would. 

The company essentially insures itself. However, there are several components to do this effectively. They are: 

  • A consultant within the United States
  • A domicile manager to help manage accounting, finance, records management, and regulatory relationships
  • An entity to help share the insurance risks
  • Legal
  • Banking partners
  • An actuary

With these in place, you're logistically good to go. There are still a few additional considerations, however.

Drawbacks of Captive Insurance Companies

Captives help companies meet their financial goals. But before opening one, it's important to be mindful of the potential drawbacks and form a plan. 

That's because captives require a lot of upfront capital. After all, you'll need to afford the premiums and deductibles. 

The IRS often places them under a microscope as well. The agency watches closely to guard against sham organizations designed to unfairly avoid taxes. 

Lastly, you're funding your own risks. That can be nerve-wracking if you're in a high-risk business.

As long as you're aware of these factors, and plan for them, you can enjoy the many advantages. But to do that, the following reasons should apply. 

1. You Want Protection from Heavy Taxation

Funding your own captive will allow you to channel more capital into your company for the benefit of your employees. The deductibles, premiums, and benefits you're on the hook, allowing you to better control costs and reduce the overall tax burden. 

2. Your Primary Insurer Will Not Cover Certain Risks

This is a good reason to start a captive insurance company because it guarantees the risks you take on as a business are insured. Yes, you're essentially financing the risk but you're doing so with the help of a qualified and knowledgeable partner.

3. You Would Like to Have More Control Over Insurance Costs

Captives allow you to keep any underwriting profits that occur. You can then channel those funds back into your organization.

4. You Wish to Capitalize on the Reinsurance Market

Reinsurance covers the risks the initial insurer won't. By setting up your own captive, you're able to buy access to this market to capitalize on a much-needed safety net. 

5. You Hope to Boost Profits

Most of the time, companies essentially say "I want one of these" about captive insurance because they're hoping to establish new profit centers. It looks good on the balance sheet and contributes toward an organization's ability to establish new capital when necessary.

Forming a Captive Insurance Company Has Its Advantages

A captive insurance company certainly has its advantages. But it's not something you want to take on without first doing your homework. 

Explore the reasons presented here and your own fiscal capabilities. If it makes sense, go for it! And before you head out, make sure you check out some of our other tips and tricks for using the insurance marketplace to your advantage.

New Frugal Finance Blog Posts & Articles