Captives are owned by those they insure, typically conglomerates or companies with multiple affiliates or subsidiaries who risk their own capital to mitigate their risks. Therefore, large companies receive many benefits from opening or investing in captive insurance companies.
Regulation Differences
Captives are not subject to commercial insurance regulations, which are significant and require constant, costly monitoring. However, they are insurance companies and are highly regulated. For example, a captive must start with an uninsured risk.
Because they have much less capital than traditional insurers and do not need to secure state guaranty funds to protect their insureds, captives participate in the alternative insurance market.
Cost and Cash Flow
Because captives reduce losses, their underwriting profits are higher. These companies also retain their capital and surpluses, and as they mature, their capital increases.
Insureds pay lower tax rates on their profit distributions because they are considered investment income. In addition, captives retain their profits to cover the insureds’ unexpected losses and are not subject to taxation.
Captives pay lower insurance premiums due to their access to the international wholesale reinsurance market. In addition, they do not have the same overhead as most commercial insurance companies.
Risk Control
Because captives are owned by their insureds, these individuals control and customize the types of services the company offers. For example, these companies may offer protection against cybercrimes, legal action or equipment damages. Because claims are handled on an individual basis and guidelines can be created for each insured, their services are customized to their insureds’ needs.
In addition, captives’ assets are protected from the business and personal creditors of their owners.
Commercial insurers experience significant pricing volatility, while captives have stable pricing. Gaining control over their risk and losses enables these companies to be more agile. Control over their pricing helps these companies prepare more effective short- and long-term plans and budgets.
If you are in an industry that is difficult or costly to insure, consider opening or joining a captive insurance company that will customize your coverage based on your business’ risk insurance needs.
