Would you like to be in Control?
Taxation: a captive should never be set up purely for tax benefits but there can be some tax advantages, particularly when compared to self-insurance. It is important that the captive is operated just like any other insurance company, albeit sometimes on a smaller scale. This means that there must be real risk and that the risks assumed by the captive must be properly diversified.
Unusual Risks: there are many risks that traditional insurers either will not touch, or for which they charge premiums almost as great as the risk itself. Captives can cover any risk and there have been many innovative and original policies over the years. These include financial risks, warrantees and new developments in health insurance.
Cash Flow: a captive has to receive premiums that are adequate to cover the risks that it underwrites. However, it can be much more flexible with regard to the timing of payment and financing terms. This flexibility also extends to the settlement of claims.
Increase to Bottom Line: insurance companies are in business to make a profit, just like any other company. If your insurance company is a captive that you own, all of that profit stays within your group. Furthermore, a large part of an insurance company's assets are its reserves, which can accrue tax-free. Both of these items will add to the bottom line of your group financial statements and increase the net worth of your company.
Cost Savings: a captive does not need to employ agents or brokers and so does not pay commissions. Neither does it have plush offices in the heart of the city. These two elements can save 30% of premiums.
The concept of captive insurance companies (captives) has been around for some 70 years and has become an important tool in the financial and risk management programs of many companies. In fact, around 50% of all commercial insurance premiums are paid to captives and most, if not all, of the Fortune 500 companies make use of the concept in one way or another. There have been many developments in the captive insurance industry over the years, but the basic captive insurance company is a wholly owned subsidiary of an industrial or commercial corporation, which exists to ensure some of the risks of its parent or associated companies. Captives have provided significant benefits to thousands of companies throughout the world by improving their insurance arrangements, smoothing their cash flow, adding to their profits and boosting the strength of their balance sheets. A captive can insure any kind of risk, including risks that traditional insurance companies do not offer. They can be used to supplement or replace existing policies or to create entirely new cover that may not have existed before. Many large organizations have several different captives, each specializing in a particular area.
Why have a captive?
This control is, of course, subject to the law and regulations of your chosen domicile.
Control over most aspects of your captive insurance compan.
Control over the policy wordings.
Control over the payment of claims.
Control over the payment of premiums.
Control over the investment of the captive's assets.
A captive insurance company puts you in control of your insurance in many ways. You will have:
Access to Reinsurance: insurance companies are the retail arm of the insurance industry. Many of them take out their own insurance, typically to cover their larger risks, and this is the wholesale side of the insurance industry, otherwise known as reinsurance. You can gain direct access to the reinsurance market through your captive insurance company and this gives you the opportunity to purchase insurance at wholesale prices.
Investment: you can take charge of the investment portfolio of your insurance company. You could appoint a stockbroker or investment manager of your choice, or take a more active role in investing the assets of the captive. In certain situations, it may even be possible for some of the assets to be loans to the parent company or for stocks in the parent, or one of the other subsidiaries, to be purchased.