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What are captive insurance companies?

Post Series: Q&A

Robert Ritch was asked; What are captive insurance companies?

According to author and business expert, Wes Sierk, a captive insurance company is an insurance company established in an offshore jurisdiction, which means that it was created and controlled by either a parent company or a professional association, and their risk mitigation is insured through either this parent company or professional association. These insured risks are commonly and repeatedly reinsured through a larger multinational insurance carrier.

Why are captive insurance companies so important?

The cost of insurance is substantially expensive for many businesses nowadays. In recent years, insurance premiums, or the amount of money that individuals or companies have to pay for their insurance plans or policies, have skyrocketed. This enormous increase in premium costs has led many professionals to explore creative and alternative strategies to reduce these costs. One innovative, but yet still proven to be successful, strategy to reduce the high costs of insurance premiums is the use of wholly-owned subsidiaries to meet insurance needs, which can control or even cut back on expenditures.

Captive insurance companies are not illegal. Even though the word “offshore” in the aforementioned definition may be off-putting and may even set off some red flags, captive insurance companies are completely legal. They are licensed and regulated entities separate from the business in question, but created and controlled by the business itself, meaning they follow the business’s format and provide insurance policies and coverage for that business. Captive insurance companies can be established to self-insurance either a part or all of the property loss, product liability, work compensation, malpractice, and virtually any other insurance coverage an individual or company may need or desire. Because of this, the main driving force behind the recent trend in offshore captive insurance extends across all the key industries, including, but not limited to, manufacturing, financial, energy-related, and real estate development, as well as medical malpractice and workers compensation. In short, by establishing captive insurance companies to insure themselves and take care of their own risk mitigation for themselves, businesses are not paying insurance premiums to major insurance companies like AIG or Zurich, costing themselves a lot of valuable money with such high premium costs, but are instead saving themselves that money by using it instead for their own insurance policies and coverage.

However, the departments of these captive insurance companies are not expected to give the businesses which created and controlled them any special treatment. Instead, they are supposed to treat these businesses just like any other regular insurance company like AIG, Zurich, or Blue Cross would. This means that captive insurance companies must have their reserves and actuaries, and are subject to the same rules and regulations as any other insurance companies. This also means that, rather than being a scam and therefore illegal, captive insurance companies are subject to the same specialized taxation rules as regular insurance companies, creating these massive reserves for any future potential disaster, loss, compensation, or other liability. But since businesses don’t have to pay premiums to other insurance companies, the reserves in the captive insurance companies will be larger with the money that the company is saving by having a captive insurance company in the first place.

With captive insurance companies, businesses are not only allowed to charge themselves premiums that are reasonably priced to them, or create and follow insurance policies that best suit them and their specific needs, rather than having to pay high premiums or abide by a regular insurance company’s policy, but they can also profit off of being careful and prudent (or, in other words, not suffering an loss or liability for the year), instead of having a regular insurance company profit off of their extreme care and prudence. There are many benefits to captive insurance companies, and it’s no wonder that so many businesses nowadays are deciding to establish them.

As of now, over 350 of the Fortune 500 companies in the United States alone have captive insurance companies, resulting in captive insurance companies forming their captive insurance industry as a whole. Some of these companies include UPS, FedEx, Verizon, and BP Oil just to name a few. Just like learning about how captive insurance works and actually starting a captive insurance company may seem like a process that will only take a few minutes or even a few hours, but can actually take several years to master, the captive insurance industry may seem small but is actually quite large in not just numbers but also financial significance. As a result, captive insurance companies have become a significant sector of the global insurance industry, and they only grow more in popularity and importance each day as more and more people make the push to save money on insurance by creating and controlling captive insurance companies.

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