We help you understand captives with a brief overview on what they are and how your company would use them to strengthen insurance cover.

A Brief Overview to Understanding Captives and How to Use Them

The insurance industry runs in cycles, with new processes beginning when insurance companies experience underwriting and investment losses.

When a new cycle starts, insurers tend to raise their premiums and make their standards stricter. You can witness similar behavior from insurers when new risks emerge.

Nowadays, however, it seems many firms are looking into captives as a creative alternative to traditional insurance policies. This may be especially true with the recent hard market and plenty of uncertainty.

So now, let’s look into captives and see how you can use them for your business.

What Are Captive Insurance Companies?

Captive insurance companies are wholly-owned subsidiary insurers that manage risk mitigation for their parent companies or a group of linked enterprises.

Companies form captive insurance companies when:

  • The parent company cannot find an appropriate outside organization to insure them against specific business risks
  • The premiums paid to the captive insurer result in tax savings
  • The insurance provided is more affordable
  • They offer better coverage for their parent company’s risks 

We should mention, captive insurance companies are not to be confused with captive insurance agents. Agents work for just one insurance company and are prohibited from selling products from other competitors.

One of the main captive insurance benefits is you can reduce your firm’s insurance costs. Plus, you can give more specialized coverages. Although, there is an added cost of maintaining a separate insurer.

Types of Captive Insurance

Captive insurance can take a variety of forms. So in this section, we’ll highlight some of the more well-known types as follows:

  • Single-owner captives
  • Group captives
  • Rent-a-captives
  • Protected cell companies
  • Special purpose captives

All of these captive types receive favorable regulations, which is another reason why companies opt for them.

Captive Insurance Tax Benefits

Many bigger corporations will establish a captive insurance business solely for the tax benefits it may provide. 

A captive insurance company’s tax structure is straightforward. The parent firm pays its captive insurance company insurance premiums and tries to deduct them in its home nation. A typical reason why companies pay for this type of service is that they reside in a high-tax state.

A parent company will establish a captive insurance company in tax havens such as the Cayman Islands and Bermuda to avoid adverse tax consequences.

Now, captive corporations are legal in numerous jurisdictions across the United States. So, the parent company’s insulation from tax assessment is a sought-after benefit in these regions.

A Captives Insurance Overview

It should be more apparent to you now what captive insurance is about. You also have some idea how you can use captives to your advantage. To better understand how captive can insurance can benefit you, we advise you to get in touch with a reputable firm.

Thanks for your time, and we hope you succeed in your captive insurance endeavors! Please refer to our blog for more helpful posts.

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