What is a Captive Insurance?

Captive insurance is a risk management insurance where a company creates a licensed insurance company to provide coverage for itself. In other words, it's a different way of paying for losses from standard insurance programs. Most insured may know about deductible and co-insurance of commercial insurance companies' policy that may consider self-insurance, but they are different. The owner can benefit by deducting the premiums as a necessary business expense as long as the risk is legitimate, and the captive insurance premiums charged are actuarially sound. These policies are usually designed to protect infrequent risks but would significantly adversely impact the business.

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Captive Insurance is Setting up Your Own Insurance Company

What is a captive insurance?

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

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

How would the Captive Structure Set up?

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. It has to be as own captive insurance company.

To finance the risks as captive insurer, 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 one 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 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 it 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 yet underutilized tools available to a business owner.

What is a Captive Policy?

It is a related business entity. In the simplest explanation, it means a business owner is self-insured by setting up an insurance company of its own, collecting the 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, and the captive insurance 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.)

These policies are usually designed to protect infrequent risks but would significantly adversely impact the business.

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

What is the benefit of setting up a captive insurance company?

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