Using a captive insurance company, or ‘captive’ for short, for risk management is not a new thing, in fact it began in the 1800’s when the first captive was formed to mitigate against the cost of fire insurance policies. A captive insurance company is a limited-purpose, licensed insurance company formed by a business for the express purpose of insuring against risks inherent in their business. It is an alternative to retail insurance markets.
By the 1960’s captives saw an increase in growth and really started to take off. The 1970’s and 1980’s represented a period of tremendous growth in captives in response to a difficult insurance market and the difficulty of obtaining product liability coverage. Captives have been used very successfully for large corporations like the Fortune 500 however, mid-market businesses from a range of industries are now using captives as a solution to mitigate the risks inherent in their industry.
Today, there are over 7,000 captives in existence which create commercial, economic and tax advantages to the companies that create them. Captives are adored for the cost reductions they help create, the ease of insurance risk management, and cash flow flexibility. Additionally, they provide coverage for risks that are neither available nor offered in the traditional insurance market and at more reasonable prices. Captives can also offer cost savings by eliminating or decreasing administrative costs and broker commissions. Further, the premiums can be invested to enhance a company’s financial strength generated by underwriting profits. Contributions to a self-insurance pool are not recognized by the IRS to be tax deductible business expenses, although the actual (claims) losses are deductible as they are paid. Premium payments to an insurer are, however, permissible business expenses that may used as an offset to taxable corporate profits.
Captives work in a variety of businesses and industries and can insure against almost any risk.