Is a Captive Insurance Program right for you?
A captive is an insurance company that provides insurance to, and is controlled by, its owners. In essence, a captive serves as a premium funding vehicle for self-insuring the losses of the parent organization for a specific retention level designated by the parent. A captive may be owned by a corporation, individual or an association, domiciled onshore or offshore, and has the option of writing the business of unrelated parties.
Why are Captives started?
A captive might be considered for some of the following reasons:
- Reduction and stabilization of premiums
- Insuring the uninsurable
- Controlling your own insurance program (i.e. stability of premiums)
- Positive impact on risk retention, risk management and loss control
- Cash flow benefits
- Estate planning
- Direct access to the reinsurance markets
- Potential tax benefits
- Consolidation of deductibles
- Reducing dependence on commercial insurers and insulating from insurance market cycles
Captives are not effective if:
- You are looking for short term premium reductions
- Your premiums are under $150,000
- You have a loss ratio above 80%
- You are unable to allocate adequate resources
There are 4 types of Captives:
1. Single parent or pure captives
2. Group captives
3. Rent-a-captive
4. Association captives
The formation of a captive insurance company is a lengthy process (up to 12 months) including feasibility studies, financial projections, determining domicile, and, finally, preparing and submitting the application for an insurance license. The need for a qualified insurance manager on the planning team is very important, particularly in the formative stages. Selecting a location or domicile is also very important. There are a number of states and off shore locations that offer a variety of tax benefits.
Captive insurance companies can help small and middle-market businesses save money and improve insurance coverage. Captive insurance companies can also serve as an estate planning vehicle. Recent eligibility changes have made captives more attainable for smaller organizations.