When an insurance company is owned by its parent company to protect its own assets and risks it is called captive insurance. In such cases, the policy holder is a parent company that usually owns many subsidiaries or related companies. The formation of the captive insurance company is done to protect itself or its subsidiaries against losses in case of any business related mishap. In this tumultuous and litigious climate that most businesses operate in, having a captive insurance company in place makes immense sense. Captive insurance companies are increasingly becoming an essential part of risk management.
Where captive insurance really benefits the business owner
Companies, whether they are big or small, are finding it increasingly difficult to afford traditional insurance. The cost of insurance premiums continue to soar and it does not appear that this trend will reverse itself anytime soon. Additionally, qualification standards for traditional insurance are increasingly stringent, given the bad experiences the insurance companies have had in the recent financial crisis. When companies do manage to qualify, the premiums are steep and unaffordable. As a result, companies for bear certain kinds of insurance and thereby expose themselves to potentially encounter huge losses. In order to avert such situations, captive insurance becomes a necessary and powerful solution.
There are many benefits to captive insurance. First, as compared to traditional insurance companies’ premium structures, the cost of insurance is much lower. One of the major reasons for this is that a company is not paying to cover any overhead costs or profits of the insurance company. The primary intention of what is captive insurance company, does not have to be profit generation, but to provide better coverage at lower premium costs. Another big benefit to forming a captive is that the claims process is greatly simplified. In a normal scenario, with a traditional insurance company, the parent company is subjected to a biased claims process. However, when a captive is present, the Parent is in complete control of the claims review process, thus it dictates whatever decision it feels appropriate to best serve its interests.
Wealth accumulation through captives
Because the parent company owns the captive, it can tailor make its coverage limits, policy requirements and premium pricing. So the parent, typically, pays lower premiums which will drive cash flow and profits. And, the parent retains the premium dollars it pays to the captive, which it then invests in a variety of investment vehicles. Overtime, with prudent investing strategies and low claims made, the company can become a sizable and powerful asset to the parent company.
Any company that is profitable, has identifiable business risk, and pays high existing insurance premiums is usually a good candidate to form a company.
Formation is a straight forward process of
1) generating a feasibility study
2) writing policies, pricing premiums
3) physical formation of the entity
4) on going management of the company, typically using a qualified 3rd party management company.