Insurance can be expensive, and when you need to file a claim, you might find your business at the mercy of your insurance provider. The issues your business might have with insurance could be mitigated by creating a captive insurance company.
What Is Captive Insurance?
Captive insurance is a subsidiary company completely owned by your business and that provides risk mitigation services. In other words, your business creates and owns the company, and that company provides insurance coverage more or less on your terms.
Forming a captive insurance company can be expensive, and it will need to meet certain standards, but it yields numerous benefits to organizations with unique risks.
Reasons to Create a Captive Insurance Company
Some of the reasons why you might want to form a captive insurance company include the following:
Closing gaps in coverage
One of the main reasons why you might want to form a captive insurance company is to fill gaps in your existing coverage. Most insurance providers aim to make a profit, and if covering a certain type of risk would cause a loss on their part, their plans might exclude it. With your own captive insurance, you’d have the option to cover some of your more unique risks.
Potentially lower premiums
Given that your captive company doesn’t have the same types of costs as a commercial insurer (such as marketing and commissions), you’ll likely be able to get certain types of coverage with lower premiums.
In addition, you have a bit more control over your own premiums, meaning they might be more stable than going the commercial route.
When used in a certain way, captive insurance companies can provide certain tax benefits, such as being able to deduct a loss reserve from taxable income. However, take care that taxes don’t become (or appear to become) the main reason for forming captive insurance—the IRS will be quick to stomp on it if it does.
Reasons Not to Go Captive
While forming a captive insurance company does have its advantages, it’s not for everyone. Some of the reasons why you might not want to go captive include the following:
The first disadvantage is the matter of increased overhead. While you may not have all the same expenses as a commercial insurance company, you’ll still need to cover administrative costs, wages for employees, loss control, and so forth.
While you may not necessarily have to adhere to all the same regulations as a commercial insurance provider, you’ll still have to meet certain standards. Knowing what those are and making sure you’re in full compliance with them could expose you to some risk.
In addition, the act of insuring yourself means you need to manage your own risks. If your captive has to pay out too much too often, it won’t be much help to you.
Should I Go with Captive Insurance?
Captive insurance is great for companies who can handle the extra administrative and overhead costs and who have unique liabilities. It can also help reduce the costs of coverage. If you’re able to meet the costs and you have a real need for it, forming a captive insurance company—with the consultation of an attorney—can help you move forward as an organization.