insuranceCaptive Insurance
Social Share:
Captive Insurance

Setting up Your Own Insurance Company

Captives insurance is the management of risk by using an alternative risk financing mechanism. In other words, it's a different way of paying for insurance losses from standard insurance programs. Most insured may know about deductible and co-insurance that may consider self-insurance, but they are different.

Captive Insurance programs have many ways of setting up. It could be a single parent captive, group captive, sponsored captive or rental captive. Regardless of the type of captive used, there are certain common elements.

All captive structures or programs must be that the risks are financed and managed by a separate legal entity. A captive cannot be a division of a company they insured.
To finance the risks, its owners must have their capital at risk. If it doesn't, it's not an insurance company, and therefore it can't ever claim to be treated as an insurance company for accounting, tax, or other reasons.
To get involved with the program, one has to be sophisticated insured to purchase the insurance or reinsurance provided through the captive program. It is similar to the investment world, where an investor must be sophisticated investors to qualify, more like individuals or corporations with sufficient net worth and resources internally to decide between buying an alternative risk financing program.

Without the elements above, it could have been better to leave the insurance to a commercial insurance program or some form of self-insurance such as high-deductible or co-insurance.

Captive insurance is one of the most powerful and yet underutilized tools available to a business owner.

The benefit of setting up a captive insurance company

  • Enhanced asset protection
  • Estate tax-protected wealth accumulation
  • significant income tax savings

what is a captive

Captive is a related business entity. In the simplest form of explanation, it means a business owner is self-insured by setting up an insurance company of its own, collecting the insurance premium from the profitable company and issuing the coverage to the existing business.
The owner can benefit by deducting the premiums as a necessary business expense as long as
the risk is legitimate,
the premiums charged are actuarially sound
Usually, it does not replace existing insurance. (i.e. It can transfer a portion of the risk to the reinsurer for excess as needed.)

Captive policies are usually designed to protect very infrequently risks but would have a significant adverse impact on the business.

Any unutilized premiums or paid in claims stay in reserves, can be invested and profit from it.

Go to Top