What Is Captive Insurance and Does Your Company Need It?

Did you know: approximately 90% of Fortune 500 companies make use of captive insurance?

Captive insurance can be a lucrative and beneficial insurance option for many businesses of all sizes. But what is a captive insurance company? And might it suit your business?

Keep reading to get a captive insurance definition and to find out everything you need to know about captive insurance.

What Is Captive Insurance?

Captive insurance companies are similar to mutual insurance companies. This is because policyholders have a financial stake in the company. Yet, several key factors distinguish captive from mutual insurance.

The first is that captive insurance policyholders have more control over the insurance company. The company is wholly owned by the insured parties. This allows the potential for greater financial gains and losses, as we’ll cover later.

Captive insurance is somewhat separate from the traditional insurance sector. Its policyholders are non-insurance companies, and is in essence, self-insurance.

We can divide it into two categories: pure and sponsored captives. The former means that the insurance company is entirely owned by those it insures. Pure captives can be sub-divided into micro captive insurance and group captive insurance. This specifies whether there is one, or more than one, owner.

Sponsored captives are not controlled by the parties insured by it.

What Are the Benefits of Captive Insurance?

There are several reasons why a company would choose a captive insurance program. Here we’ll go into the types of businesses that are best suited to captive insurance.

The benefits of captive insurance are predominantly financial. Captive insurance can mean less expensive insurance and can also help with tax deductions. This is the main reason why larger companies choose captive insurance.

It can also provide more specific insurance coverage to a company. If you find that no existing insurance policy covers your business’s needs, a captive insurance policy might be for you.

You can make an analysis of whether this type of insurance will be beneficial to your business by speaking with a captive insurance agent.

Are There Any Disadvantages to Captive Insurance?

Finally, it is worth considering the potential downsides of captive insurance. They are not worth exploring for all businesses, which why the traditional insurance sector still exists.

To become involved in captive insurance, your business is required to have a substantial amount of capital on hand. This is particularly relevant in the initial stages, as set-up costs and regulatory expenses can add up.

The reinsurance market is also known to be more volatile than the traditional insurance market.

Finally, is also important to note the administrative drawbacks. A substantial amount of manpower must go into preparing and underwriting claims. Although, you can outsource these to a captive management company.

Now You Know All About Captive Insurance

We’ve now covered what exactly is captive insurance and how it differs from other forms of insurance. We’ve also looked at why many businesses choose it and the benefits it could provide to your company.

If you found this article useful, make sure you check out our other business posts!