Alternative Risk
What is a Captive Insurance Company?
A captive insurance company is a form of self insurance organized for the primary purpose of providing insurance protection to its owners and/or related entities. For decades, large corporations have established captive insurance arrangements. More recently, the small to mid-size closely held business owner has taken advantage of the numerous benefits afforded by a captive insurance arrangement. Capitalizing on these benefits, however, does not necessarily mean that your business must expose itself to unwanted or unnecessary risk if structured properly.
Benefits of a Captive
- Provide coverage for unique risks that may otherwise not be available in the commercial marketplace or may be cost prohibitive.
- Lower overall traditional insurance costs.
- Improve risk management practices and claim patterns.
- Improve cash flow to operating business.
- Utilization of insurance tax accounting principals.
- Access to the direct reinsurance market.
- Insurance premiums paid to your captive may be tax deductible to the parent sponsor organization and profits within the captive may be excluded from U.S. taxation, with the exception of investment income, under Internal Revenue Code (IRC) Section 831b.
- Produce important estate planning and asset protection advantages to business owners.
History. The term “captive” comes from Frederic M. Reiss, who coined the term while he was bringing his concept into practice for an industrial client in Ohio in the 1950’s. The term “captive” came to Reiss when working with his first client, the Youngstown Sheet & Tube Company. They had a series of mines where the ore was used solely for the company’s operation and its management referred to them as captive mines. When Reiss helped the company incorporate its own insurance subsidiaries, they were referred to as captive insurance companies because they wrote insurance exclusively for the captive mines. Reiss continued to use the term for his concept and both the captive and the term have adopted a far wider context. Reiss is coined “the father of captive insurance.”
Will a Captive Fit Your Business?
A collaborative approach between captive experts in the areas of legal, tax, accounting, estate planning, and captive consulting is the best approach to determine whether a captive is feasible for your business. Call us today to find out if a captive insurance company is a viable alternative option for your insurance needs and concerns.
