A Captive Insurance Company (captive or CIC) is a property and casualty insurance company established to provide coverage primarily for a parent company. It can be a valuable risk management tool which allows businesses to more effectively manage corporate risks of all kinds. Captives often are set up to insure enterprise risk, risk for which commercial insurance is not available or may be too expensive. In many cases, the owner of the parent company is also the owner of the captive; however, the arrangement may be alternatively structured so the captive is owned directly by the operating company, another person, entity, or trust. The captive insurance company must act as a legitimate business entity and must remain in compliance with all insurance regulatory provisions and Internal Revenue Service requirements.
A captive insurance company may be established to provide unique coverage or coverage not available through commercial property and casualty insurance companies. Coverage underwritten through and insured by a captive insurance company is often best utilized as a supplement to existing coverage, providing a more effective total risk management program for the business owner. The captive insurance arrangement may also be implemented in order to allow the captive owner to capture overhead, profit and other capital which would normally transfer to another insurance carrier. The risk management consultant will review existing policies, identify gaps in coverage and recommend potential areas of exposure. Once the desired insurance risks have been identified, an actuarial company will be retained to determine an appropriate premium for the risks assumed by the captive, which will in turn provide coverage for the named risks.
In these uncertain times, the successful business owner faces the pressure of multiple risks in their daily operations. Examples of these risks include: loss of a business license or professional license, adverse financial impact of regulatory or legislative changes, loss of a key vendor or major client, loss of franchise license or lease, environmental losses, regulatory inspection failure, etc. Small to mid-size privately held businesses can benefit from risk management tools that can help them more effectively manage such enterprise risks and control their insurance costs. To that end, the business owner should consider establishing their own Captive Insurance Company. If properly structured and underwritten, premiums paid by the parent operating company to it’s captive insurance company for property and casualty coverage should be tax-deductible to the parent company as an ordinary and necessary business expense.
A captive insurance company allows the business owner to reserve against property and casualty risks, and other enterprise risks, as noted above. These are often the types of risk that keep business owners up at night and could result in business interruption, loss of revenue or even drive them out of business. These are risks that the business owner faces every day, but for which insurance coverage may not be available or may prove too costly to obtain. Business owners currently self insure for risks of this type, or may utilize a reserve account on their balance sheet for this purpose. To manage these needs, the parent company can create a captive insurance company which will design an insurance program tailored specifically for their unique situation.
There are no firm rules regarding the minimum amount of gross revenue a company should have in order to benefit from implementation of a captive insurance company, nor is there a minimum amount of annual insurance premiums a company should be prepared to pay before it considers forming a captive. In order to successfully implement and manage the captive insurance company, there are a number of professionals who must be engaged to help develop, implement and provide administrative management for the company. Oxford Risk Management Group will coordinate the efforts of our Best-in-Class independent team of experts to accomplish a turn-key service for our clients with the most experienced team in the industry.