Companies that choose to utilize captive insurance make an investment that helps keep costs centralized. Whether an individual, group, or corporation, this plan allows an entity to underwrite their own coverage and manage their risks. This gives more control in the insurance process, as there is a significant reduction in the number of premiums that are released to third-party insurers. There are three major advantages associated with the captive insurance industry.
Access to the Reinsurance Market
With many of the national providers having to adapt their reinsurance policies, the captive program makes it easier to purchase reinsurance whenever it is needed. The parent company or administrative structure is able to purchase the excess insurance for the captive, and the individual captive is able to purchase it.
High Levels of Flexibility
To the industry as a whole, the rates and form of the insurance are much more flexible in the underwriting process. The rates are generally dictated by the current market, especially with a more formal insurance or risk finance program, but captures can have changes made as specific losses are experienced.
Tax Advantages Are Available
Even though the IRS has been working to change how captives are taxed, it is still considered an insurance company. As the loss reserves of the captive build up, they aren’t taxed until they are paid out and taken as earnings. The parent company is able to pay the premium to the captive, and get an accelerated tax deduction is everything is in balance.
Investment Income Option
Since it is wholly owned, the policyholders of the captive dictate how the loss funds are held until they are dispersed. The is also true with investment income accrued from loss reserves. Diversification is often encouraged, as some cell captives offer a rate of return for policyholders.
There will always be pros and cons to each business decision, but these are several reasons why joining a captive might be right for you. Consider the decision carefully, and always keep the long-term goal of loss protection in mind.
