Why Form a Captive?
Properly formed and managed, a captive is more than an insurance company. In addition to stabilizing insurance budgets, captives provide:
- Tax Benefits - Captives can accrue tax-deductible reserves for unpaid claims, whether known or estimated. In addition, favorable federal tax legislation currently exists for small property and casualty insurance companies.
- Reduced Insurance Costs and Pricing Stability – Captives can avoid excessive commissions and administrative costs built into the pricing models of traditional insurance companies. In addition, harder insurance markets in the future may make your captive an alternative, lower cost choice for risk management.
- Improved Cash Flow - With a captive, premiums and investment income are retained within the group rather than going to large insurance companies and premium payments to the captive may be structured to provide tax benefits. In addition, a captive represents an additional line of business for your organization and can be managed as a profit center.
- Risk Retention Flexibility – Increased deductibles can be insured through the captive thereby reducing premium costs for risks covered by commercially obtained insurance.
- Risk Management Planning - A captive can drive risk management “best practices” designed to reduce future losses. Having a captive in your business structure provides an effective mechanism and formalized structure for better managing the risk of your business enterprise as a whole.
- Reinsurance Market Access – Captives can access the reinsurance markets, which can offer lower cost structures than direct insurance markets. In addition, access to reinsurance markets allows the business owner to select the layers of risk to be assumed, thereby providing maximum flexibility.
- Increased Control and Flexibility – Captives can better control underwriting, rates and forms; coverage to members can also be offered where not available from commercially obtained insurance markets.
- Investment Planning - Premiums and surplus within captives require structured and diversified investment management, frequently resulting in a more focused and successful investment strategy for companies. Excess surplus that accumulates over time may be distributed to owners.
- Estate Planning - Captives may be owned by individuals or family trusts for the benefit of specific individuals. They can be effective mechanisms for transferring family wealth to future generations.
- Asset Growth – Initial capital contributions and annual premiums as well as investment income frequently grow quickly over time, thereby making the captive a repository for substantial wealth.
- Asset Protection – Properly structured, a captive can provide excellent asset protection for business owners. In addition, the business owner has control over the claims process.
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