What Is a Captive Insurance Company?

A captive insurance company (CIC) is a corporation established either onshore or offshore to insure the risks of its parent company or a group of companies. While there are many benefits that can be derived from a CIC, the primary goal of any CIC is to reduce the parent company’s overall cost of risk management.

CICs may allow insured companies to decrease their insurance and reinsurance costs, control premium costs, and increase profits and cash flow. They also may provide for coverage of unusual risks that are not customarily insured by commercial insurers, allow the insured direct access to reinsurance markets, improve risk management, and afford possible tax benefits.

There are many different types of CICs. The most common are pure captives–wholly owned by one parent and/or its affiliated companies; and group captives–owned by a number of similarly sized unaffiliated entities that are usually in the same line of business (e.g., doctors). Generally, CICs are run by a board of directors designated by the parent company.

CICs generally can insure risks ordinarily covered by commercial insurers, including malpractice coverage, automobile liability, workers’ compensation, employee health-care costs, product liability, property damage, liability umbrella coverage, wrongful termination, and sexual harassment. Regardless of the type of risk, like most commercial insurance, the CIC typically will transfer some of its risk to another insurance company, referred to as reinsurance. This allows the CIC to control the amount of economic risk exposure it retains.

Generally, the parent company can deduct premiums paid to the CIC, so long as the IRS recognizes the captive as a true insurance arrangement. Also, if certain requirements are met, the premiums received by the CIC are tax free.

Establishing a CIC involves a high capitalization commitment, significant administrative costs, state or foreign domiciliary regulation, and the possibility of inadequate loss reserves to cover unexpected losses. But after careful analysis, a CIC may be a way to finance a company’s risk at a reduced cost.

If you have insurance questions, contact the experts at Henssler Financial: 770-429-9166 or experts@henssler.com. 

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The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.