For over a century, captive insurance has been a viable insurance solution for business owners. Formerly reserved only for the largest corporations, captives have evolved to meet the needs of nearly every operation, including small businesses. As the traditional insurance markets tighten, more and more companies are turning to captives as a solution. There are significant advantages associated with captive insurance; in this guide, we will explore the benefits of captives to share with your clients.
Captive insurance is a self-insurance entity formed and owned by a parent company or group of companies for the sole purpose of insuring the owners’ risks. Captives can insure the same risks as a traditional insurer, including general and professional liability, workers’ compensation, and property insurance. Captives can also insure special risks – particularly those that are unavailable or prohibitively expensive in the commercial insurance markets.
Numerous captive insurance models exist, including:
Each of these captives is best suited for specific applications, and all have significant benefits for business owners.
For business owners that are seeking alternatives to the traditional insurance market, captives represent a viable path forward. There are six primary benefits of captive insurance:
As illustrated above, captive insurance provides very real benefits for business owners. Captives also offer enticing tax advantages as well as the ability to return underwriting profits to the parent company or group.
A properly established and structured captive insurance entity provides tax benefits like:
It is important to note that the Internal Revenue Service (IRS) requires risk shifting and risk distribution to be present for the captive to be considered a legitimate insurer. In other words, captives formed solely for the purpose of gaining tax advantages – not to provide insurance for a parent or group — may result in steep regulatory penalties.
In the captive insurance model, the parent company or group/association makes annual premium payments. In years of low claims volume, underwriting profits are returned to the parents. Again, these profits are distributed to the owner(s) of the captive under favorable income tax rates and may be distributed as capital gains or dividends. By adhering to risk management practices, thus reducing the frequency and severity of claims, profits may accumulate.
Captive insurance provides insurance protection for nearly every type and size of business operation. This alternative to the traditional market offers flexibility, tax benefits, and control not found in the traditional market. It sounds like the perfect solution – and for many business owners, captives are. Still, there are three factors a client should consider when determining if a captive is right for their insurance needs:
By carefully assessing these factors, analyzing current and future insurance needs, and by exploring the many benefits possible with captive insurance, companies can make smart financial decisions. Captives continue to gain acceptance by companies around the world – as an alternative to traditional insurance markets, this solution shows great promise.
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 (855) 975-4949.