Large companies create captive insurance companies to provide coverage in markets where coverage was either overpriced or not available. These companies are owned and operated by those they insure, and the companies that provide captive insurance services also enjoy tax, cost and income benefits.

What They do

Captive insurance companies insure their owners against risk and gain underwriting profit. Captive insurance requires the investment of the insured’s resources, but these individuals or companies become owners of the company. They also gain control and receive profit benefits. These profit distributions are not dividends, as policyholders in mutual insurance companies receive, but they are distributions of all profits.

Captives are not subject to commercial insurance regulations, which seeks to protect those who are insured from those who insure them, because they are much smaller with much lower capital investments. Therefore, they participate in the alternative risk transfer market.

Types of Captives

Insurance agents may come together and start a captive insurance company. These agency captives insure the agents’ clients against risk.

Pure captives are completely owned by those they insure. Pure captives can be owned by a single entity (single-parent captive) or by many entities (group captives). Group captive owners may be from the same industry and have similar risks. Together, these owners gain buying power and improve the efficiency of their risk management processes.

Association captives are developed for specific association members. If a captive is owned and operated by entities not related to those it insures, it is considered a sponsored captive.

What Companies Should Consider Captives

Companies with high annual profits, $500,000 or greater, and who seek tax deductions may consider investing in captive insurance. Conglomerates or businesses with many subsidiaries or affiliates may also consider using captives. If your business is uninsured or underinsured and you seek to mitigate your risk and protect your assets, you may consider captives.

Operation

Captives are insurance companies. Therefore, they must have experienced management. In addition, captives are subject to annual reviews and audits. They must comply with tax laws and manage their claims. They are also regulated. Although the businesses that are insured by captives actually own the company, captives are typically managed by a management company rather than the owners or managers it insures. The management company should have experience planning and managing insurance companies to ensure the company maintains proper liquidity.

If you are willing to risk your company’s capital, insurance is either unavailable or too costly, you want control over your insurer and desire the tax benefits of owning an insurance company, consider opening or buying into a captive.