What is a Captive?

In most simplistic terms, a captive is a licensed insurance company fully owned and operated by the insured, essentially a type of self-insurance. Instead of spending to use a commercial insurer’s money, the owner invests their own capital, taking responsibility for a portion of the risk. 

Owners choose to work with captives because they are an effective way to take financial control of insurance allocations and help take control of managing risks. Once established, a captive works like any other commercial insurance company. This blog will help explain some of the fundamental aspects of captives and highlight the reasons why captives are receiving renewed attention. 

Aspects Of A Captive and Why You’d Need One

Captives Vs. Traditional Insurance

While there are numerous differences between captives and traditional insurance, many traditional insurance companies own or work closely with captives and the alternative risk financing market. Since traditional insurance companies possess significant financial strength, they will often be needed to reimburse claims resulting from large financial losses. A captive can be used to shift costs of the insured, while other cost-shifting techniques include deductibles, retentions, and coinsurance. All of these options, including a captive, mutually benefit both parties by offering more control to the insured and eliminating costs for the insurer. 

Advantages Of Captive Insurance

Typically, captives are formed mainly for the purpose of risk management. Businesses can substantially reduce insurance costs in comparison to premiums paid to commercial insurance companies and a captive can provide coverage that is unattainable in the private market. In addition to the ability to obtain more specialized coverage for a business’s risks, it grants better control over claims decisions. Additional benefits include:

  • Financing: Although a company may have a clean loss history for the year, they may still experience increased premiums with a commercial insurer because of a poor market, or overall volume of claims processed by the insurance company. With a well-operated captive, you can save capital while insulating against risk.
  • Control: One of the greatest advantages of working with a captive insurer is that companies have more control over safety, losses, risks, and claims administration. The captive model also incentivizes safety in the workplace because the capital belongs to the company. 
  • Wide Coverage: It’s proven that companies who have an unfavorable loss history, or simply operate in high-risk ventures, oftentimes have difficulty obtaining coverage in the open market. Captive insurance can offer tailored coverage unique to the business’s risk exposure. 

Why Go With The Captive Option?

There are many reasons a company would choose the captive option. One of many is because of accounting and tax rules, which allow deductions of insurance payments by insurance companies. Since a captive is an insurance company, reserve funds held for the loss of future payments are deductible. 

It’s important to consider a captive as a cost-effective solution and to structure it in such a way as to participate in the profits of your own risk and not just accept additional costs without the added benefits. To achieve a captive’s full potential, it must be set up so that you finance more than simple small risks. 

Who Utilizes Captive Insurance?

The best candidates for captive insurance are companies with a steady cash flow, high insurance premiums, and low claims frequency. Also, companies that are looking to combine their overall enterprise risks, such as employee benefits, healthcare, and workers’ compensation, are suitable candidates for captive insurance as well. Captive insurance should also be considered for companies with:

  • Business leaders that want or need asset protection
  • Sustainable operating profits of $500,000 or more
  • A desire to reduce reliance on commercial insurance coverage
  • A diverse workforce with varied medical needs 

There are plenty of risks that commercial insurance providers can’t offer, so captive insurance is a viable option for those looking for a way to insulate themselves from non-traditional risks. When properly designed, a captive policy can provide many advantages and alleviate your company’s exposure to potential risk. 

Possible Drawbacks of Captive Insurance

Although captive insurance can be a great way for companies to reduce costs of risk management, It’s not the silver bullet for every organization. Here are some of the possible drawbacks to forming a captive insurance company.

Increased Burden On Administration

The owners of the captive will ultimately be responsible for things such as claim administration, loss control, and underwriting. These services will require additional time, money, personnel, and management commitment. Such sacrifices may offset the advantages of a captive for certain companies. However, this problem can be combated by partnering up with the right insurance team.

Initial Capital Commitment

At least during the initial stages of a captive formation, there will be a financial burden to fund the setup of a captive. Also, generally speaking, the reinsurance market acts quicker than the primary insurance market. Since the reinsurance market tends to be experience rated, a reinsured risk of a captive insurer might face premium increases sooner, in some cases.

Quality Partners Matter

Organizations that choose captive insurance will need to establish relationships with a wide network of service providers ranging from attorneys to underwriters to accountants. The right partner in this process can save you a tremendous amount of work, time, and money. You want a partner who can provide the offerings that fit your business, provide a high-quality level of service, bring insightful help to guide you through the insurance process, and have years of experience managing captives. Picking the right partner will be crucial for running a successful captive.

Benefit From Captive Insurance With Alltrust

Do you think your company is a solid candidate for captive insurance? If so, Alltrust Insurance would love to help your company reap the potential benefits of a captive. Our team at Alltrust are masterminds when it comes to the world of insurance, employee benefits, and operating a captive. By working with us, you can help take control of your risk management and reduce insurance costs, helping your company thrive and grow. For more information on our services and how we can help your business, please contact us today.


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