Why Form a Captive?

Generally, there are many benefits associated with captives. Some of the more common are as follows:

• Cost reductions
  A  corporation paying an insurance premium to a conventional insurance company  contributes to the expenses of an insurer (including inefficient  administration and other insureds’ losses) and profits of the insurer. By  establishing one’s own insurance vehicle, such costs and profits subject to  control within the same economic family.
    
• Cash Flow Benefits
  A captive  allows an owner to control the investment portfolio to which the excess  premiums are applied. It also allows the money otherwise paid to third-party  insurers to remain in the same economic family, unless claims are  paid.
    
• Estate  Planning  
  Business owners  with estate planning objectives may find that Captives provide many attractive  options.  Consultation with well qualified and trusted advisors is  important to insure that your Captive structure meets necessary qualifications  and requirements.
    
• Reinsurance
  Reinsurance is available to  insurance and reinsurance companies only, and typical cost ratios associated  with such reinsurance are far less than conventional “primary” insurers. By  accessing a second tier of insurance products (through the establishment of a  captive insurance company) a business can access a wider array of insurance  products at more effective costs.
    
• Availability of Cover
  Certain  types of coverages are unavailable or difficult to obtain, because of such  things as historic loss experience for a sector or industry, such as medical  malpractice. By setting up a captive, a business can insure such risks and  obtain access to the reinsurance markets that may have greater appetite for a  risk.
    
• Taxation
  Certain tax benefits may be  available by utilizing a captive insurance company. Any tax benefits, however,  should not form the reasoning behind the establishment of a captive insurance  company.
    
• Risk Management and Underwriting  Profitability
  Conventional insurance is  typically provided on a guaranteed cost basis and there is little incentive to  improve risk management, as there is no participation in the profitability of  the insurance program. However, with a captive insurance company, the parent  will benefit from good claims experience, and surplus in the company may be  available to the parent by way of dividend. A captive can therefore provide  great incentives to improve the risk management philosophy throughout an  organization.
    
• Underwriting Stability
  A captive  insurance company is less vulnerable to the cyclical nature of hard and soft  markets that blight the conventional insurance market. A captive can aide a  business that requires accurate financial projections.

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