Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or companies. Captive insurance is essentially an “in-house” insurance company with a limited purpose and is not available to the general public.
Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or companies. Captive insurance is essentially an “in-house” insurance company with a limited purpose and is not available to the general public. It is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured. There are many advantages to a company when establishing a captive insurance company.
Pan Insurance can help your business set up its own captive insurance company to insure or reinsure the risks that a company assumes while doing business.We will review existing risks and analyze non-traditional risks that a company may be exposed to and not even be aware exist. Captives have been used for over forty years, and historically they were used by larger companies. However, they have increasingly become an invaluable tool for the successful small to mid market. As the cost for insuring risks has increased, many business owners have found a way to more efficiently manage their risk by forming their own captive insurance company to provide for protection against loss. In doing so, the business owner can take advantage of substantial federal and state income tax savings and utilize those savings to fund other business opportunities.
Captive Insurance Key Advantages
- Premiums paid to captive may be tax-deductible
- Captive may be established off-shore
- Off-shore captive may elect to be taxed as a U.S. Corporation
- Vehicle for meeting business owners estate planning objectives.
- Annual premiums up to $1.2m may be received by captive tax-free
- Retain profits otherwise lost to commercial insurance company
- Profits may be taxed as dividends
- Recoup investment at capital gains rate
- Offers opportunities for asset protection
- Creates opportunities for wealth transfer
- Insure risks not generally accepted by commercial carriers
- Offers greater opportunity to control risks
- Control the investments of the captive
- Reduce premiums by managing risk
Captives can be owned by a family trust or other entity for the benefit of future generations. This provides highly efficient estate planning / wealth transfer solutions for business owners.
Insurance premiums are an expense to the parent company and flow tax free to the insurance company, where they grow in anticipation of future claims. With annual premiums, the asset base of the captive can quickly grow to be very large.
A captive can safely protect assets from legal attack by creditors and predators. The captive owner has overall control of the claims process, meaning that eh only business that can file a claim is the parent company.
Life Insurance Protection
Types of Captives
Insures the risks of related companies. The most common form of captive.
Group / Association Captive
Insures the risks of companies in an industry group, franchise, or other association. A group captive can share the risk among several participants and spread the fixed cost of the captive among many members.
Formed by insurance brokers to allow them to participate in high-quality risks which they control. For example, a broker specializing in the crane industry can organize a captive just for his or her crane clients, thereby providing better coverage, capacity, price and service.
Provides captive facilities on a “rental” basis. Protected cell captives (PCC) enables users to legally segregate their assets and liabilities within a separate vehicle, or cell. This allows many cells to be created within the same captive. Most jurisdictions now allow “cell” captive structures.
Risk Retention Group
A group self-insurance plan or group captive operating under the Liability Risk Retention Act of 1986. A risk retention group can cover the liability exposures, other than workers compensation, of its owners. Once licensed in a state it can operate in any other state without additional licensing. This is often used to insure medical malpractice risks, and avoid of a fronting insurance company.
Special Purpose Vehicles (“SPVs”)
SPVs are used in risk securitization. They are reinsurance companies that issue reinsurance contracts to their parent and cede the risk to the capital markets by way of a bond issue.