Captive insurance is a form of self-insurance where a company creates a subsidiary insurance company, known as a “captive insurer”, to provide insurance coverage for the parent company’s risks. The captive insurer is owned and controlled by the parent company and is used to provide insurance coverage for risks that are not adequately covered by traditional insurance providers.
Captive insurance can offer multiple benefits to companies, such as:
- Customized coverage: Captive insurers can offer customized insurance coverage to meet the specific needs of the parent company, which may not be available through traditional insurance providers.
- Cost savings: Captive insurers can often offer insurance coverage at a lower cost than traditional insurance providers, as the parent company is able to retain the profits from the captive insurer.
- Greater control: Captive insurers provide the parent company with greater control over the insurance process, including underwriting, claims handling, and risk management.
- Tax advantages: Captive insurance can offer tax advantages to the parent company, such as deductions for insurance premiums paid to the captive insurer.
However, captive insurance also carries risks, such as:
- Capital requirements: Captive insurers require significant capital to establish and maintain, which may be a barrier for smaller companies.
- Risk concentration: Captive insurers may expose the parent company to greater risk concentration, as they are focused on providing insurance coverage for the parent company’s risks.
- Regulatory requirements: Captive insurers are subject to regulatory requirements, which can be complex and costly to comply with.
Overall, captive insurance can be a valuable tool for companies looking to manage their risks and insurance costs. However, it’s important for companies to carefully consider the risks and benefits of captive insurance before establishing a captive insurer.« Back to Glossary Index