The concept of forming captive insurance has emerged as a popular choice of big corporate houses right from MNCs to over 90% of Fortune 500 enterprises. Precisely, a captive is a holding or subsidiary entity formed to take care of insurance of its non-insured parent company(s). According to Charles Spinelli, captive is established with the objective of meeting all risk management issues according to the unique needs of the parent company or group of parent companies. Moreover, having a captive benefits its owner company to avail potentially substantial tax advantages, which is essential and can be beneficial for the longevity as well as the profitability of the parent company.
What Are the Different Forms of Captives in Insurance?
Noteworthy, captive insurance is found in different forms. With its increasing popularity and evolvement of its outlook, as of now, companies solely or in the group decide to create a variety of captive models matching its or the group companies’ structure and needs.
Following are some popular forms of captive insurance companies as pointed out by Charles Spinelli:
Pure captive – Aka single-parent captives, pure captive is basically a wholly owned subsidiary insurance of a parent company. As a popular choice for large companies, the subsidiary provides insurance coverage for all risks and loss exposures of the single-owner company.
Group Captives
As its name implies, group captive is formed and owned by a collection of varied small parent companies generally belonging to the same industry. The idea of forming a group captive is prevalent among companies whilst:
- They want to lessen their start-up costs.
- They are ready to pool their risks as well as claims experience.
- The volume of premiums of these entities is not so much that makes sense to form a separate captive or seem economically practical.
- They agree to access underwriting experts that otherwise would be costly and time-consuming.
Association Captive – Similar to a group captive, this type of captive is owned by a series of companies. However, despite belonging to the same industry, the companies are also members of the particular association.
Advantages of Owning Captive Insurance
Forming a captive offers its owner(s) several benefits which is the reason that this industry has witnessed a steady growth in the last couple of years.
Take care of the unique needs of risk management
One of the basic advantages of captive insurance is that the entity provides its owners (parent companies) the ability to customize their insurance coverage to match their unique risks and necessities. Depending on the need, often some companies wish to get coverage in areas that are emerging or hard-to-insure risks such as cyber liability. Most traditional insurance companies are unwilling to give coverage for this kind of risk or sometimes charge very high premiums.
Provides ample tax advantages
The second important advantage of forming captive insurance models is that it enables the parent company or companies to avail attractive tax advantages with proper tax planning. The return supports the parent company to use the excess money in more productive areas and increase its profitability.
Minimizes company costs
Forming a captive enables companies to enjoy multiple cost-saving advantages. While buying insurance plans from traditional insurance companies lets them earn profits from their cost of premiums, forming captive insurance helps businesses avoid paying these additional costs. They can also save by discarding the need to pay insurance fees and thus lowering operating costs.
