Everything You Need to Know About Captive Insurance

Most companies usually depend on an insurance provider to cover all potential risks. However, there are large businesses that take on a specific type of insurance plan known as captive insurance. This practice is not that common among most companies, but it is mostly utilized by larger corporations due to a variety of advantages.

Definition

Captive insurance is a coverage plan provided by a captive insurance company. This smaller company is a subsidiary that is wholly-owned by the parent company, and it offers insurance to that entity or to the parent company’s other divisions or subsidiaries. It is a form of self-insurance and it differs from a mutual insurance company in the sense that the insured entity and clients have more control over the company’s actions and are more involved in the process.

Advantages of Captive Insurance

Many companies start captive insurance companies since they gain several advantages over working with independent insurance providers. The main upside of having captive insurance is an increased control over several aspects of the policy, including claims and safety and loss control. Beyond advice from a captive insurance consulting service, the company and even the insured individuals make the decisions. Captive insurance also allows for improved cash flow, increased pricing stability, and coverage aimed at company-specific risks.

Disadvantages of Captive Insurance

There are a few potential drawbacks to having a captive insurance company. These businesses must make a substantial investment to keep the subsidiary running. This means they can benefit from gained profits, but it also places some pressure on the success of the insurance company. Also, there are additional costs to consider, such as hiring additional employees and overhead expenses. Captive insurance also invites some compliance issues, especially in the matter of taxes.

A captive insurance company allows companies greater control over their insurance benefits plans. They must weigh in the benefits and drawbacks and determine if this self-insurance option is appropriate for their goals.