A captive insurance company is an entity created and wholly owned by one or more non-insurance companies to insure the risks of its owner, or owners. Captive insurance companies can be leveraged to provide small to medium-sized businesses with an option to better serve the insurance needs of their companies. Captive insurance companies become advantageous when commercial insurance options become financially burdensome, or cannot provide the type of coverage a company requires.

As with all other business decisions a company faces, captive insurance companies have various advantages and disadvantages. When deciding whether to utilize a captive insurance company, this guide can help you determine some of the important benefits and drawbacks your business faces.

Some of the benefits of starting a captive insurance company include:

  • There is a broader range of coverage options that are available to a captive insurance company, allowing the company to tailor its coverage to the exact, and sometimes, complicated needs of the parent organization.
  • In a captive insurance company, the parent organization has the flexibility to time premium payments to their liking to maximize cash flow.
  • The insurance cost is reduced with a captive insurance company since there is no profit built into the premiums that are paid like commercial insurance companies. Captive insurance companies also earn investment income on premiums and capital to the direct benefit of the captive and its owners.
  • There are various tax savings available to the parent company that comes with forming a captive insurance company.

Some of the drawbacks of starting a captive insurance company include:

  • Starting a captive insurance company requires a large amount of capital up front, or else it runs the risk of becoming financially deficient during times where many claims are being filed.
  • Internal costs can be significant due to the time and resources needed to run the captive insurance company.
  • Although there are various tax strategies that can be implemented with a captive insurance company, this also comes with increased scrutiny from the IRS. It is very important that before taking a tax stance involving a captive, the parent company has consulted their CPA to ensure proper compliance.

In summary, captive insurance companies can be an advantageous option for certain companies have the proper resources in place to utilize them. Since there are many variables to consider when starting a captive insurance company, it is best that the parent company, along with their CPA, do all the necessary research to decide if a captive insurance company would be beneficial to them. Have a Barnes Dennig representative reach out to you at no cost to determine if your organization may be fit to leverage a captive insurance company, or to answer any questions that may come up when making the decision to implement a captive insurance company.