Captive formation benefits may be achieved by any number of circumstances which positively impact your business group.
The growth of captive insurance holdings has more than doubled over the last 5 years and over half of the Fortune 1,500 companies in the US utilize a captive.
Lower Insurance Costs – This is achieved through no profit loading, elimination or reduction of broker commissions and lower administrative costs.
Cash Flow – Insurers rely on investment and underwriting profit to improve cash flow. Premiums are typically paid in advance while claims are paid out over a longer period of time. By utilizing a captive, premiums and investment income are retained within the group. The captive can also provide more flexible premium payment plan thereby offering a direct cash flow advantage to the parent.
Risk Retention – A company can manage its own risk by increasing the deductible levels. These deductibles can be insured through the captive.
Risk Management – A captive can act as a focus for risk management and risk financing activities of its parent organization.
Access to the reinsurance market – A captive can access the reinsurance market which operates on lower cost structure than a direct insurer.
Control – Control of underwriting, rates and forms, as well as control of claim settlements and investments.
Flexibility – A captive can offer specifically tailored wordings in the structure of the policies.
Coverage provision – Captives can provide coverage to subsidiaries and members that are not available in the market place, such as punitive damages.
Tax Advantages – Insurance companies are provided a special tax treatment; they can accrue tax-deductible reserves for unpaid claims, whether known or estimated.
What is a Captive Insurance Company and Why Might Someone Want to Form One?
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Dana Hentges Sheridan, Esq. General Counsel of Active Captive participated in a discussion of why a business owner might want to form a captive insurance company. The interview is conducted in two segments, one from the insurance and risk management perspective and the second to discuss tax and wealth management benefits. The primary point of the discussion focuses on the captive as a risk management and insurance tool.