Business owners, regardless of industry or market, spend countless hours focusing on the operation, management, and overhead costs of their business ventures. Business owners must be accountable to their employees, their stakeholders, and their customers, and smart businesses know there are many variables that can impact business operations.
Along with owning and operating a business comes the knowledge that there are many risks that can dramatically affect the business and its financial assets. In order to manage these risks, many businesses use captive insurance companies to formulate a plan for risks, insuring the business while reducing costs. These captives can also create a new source of revenue for the businesses that take advantage of risk management plans.
The Role of Captives in Risk Management Planning
Captive insurance has been a part of business since the 1950s. In years past, these insurance services were reserved for some of the largest corporations, but in recent years have been adopted by thousands of smaller firms, including non-profit organizations and middle-market business operations. Captives are defined as insurance companies established by non-insurance companies, either individually or as a group of related business interests, to insure the risks of its owner or owners. This model represents a powerful form of “self insurance”, and are designed specifically to manage the risks of its owners or members (the insured).
How do captives play a role in risk management? Under these insurance arrangements, companies can set aside a portion of their funds to cover uninsured losses that may arise from claims against the business. Typically, these plans insure many of the same risks as a traditional commercial insurance company, including general liability and workers’ compensation. In addition, captives insure against risks that may be too expensive or less available through traditional insurance channels for many businesses, including:
- Loss of key business contracts
- Loss of employee productivity
- Intellectual property litigation
- Cyber security claims
Captives can provide financial stability and excellent risk management practices, particularly for those firms that may operate in high tax jurisdictions or that may have multiple global business entities.
Advantages of Captive Insurance
There are many advantages to employing the use of a captive insurance company as a risk management plan. They have been demonstrated for decades in helping to mitigate insurable risks for businesses of all types and sizes, but offer tax advantages that can outpace traditional commercial insurance plans. Some of the advantages include:
- Increasing the efficiency of risk management by lowering costs.
- Gaining access to reinsurance markets.
- Recapturing underwriting profits while reducing insurance administration costs.
- Improving the availability of custom-tailored risk coverage suited for the unique aspects of the business operation.
- Deferred taxation of premium income.
- Tax deductions on premiums paid.
- Protecting both personal and business financial assets from lawsuits.
Establishing a captive insurance plan encourages companies to make regular reviews of their associated risks, allowing them to respond in a proactive manner to evolving changes in their markets and the coverage needed to mitigate business risks.
About Caitlin Morgan Captive Services
Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.
Sources: Forbes, NAIC, PwC