enterprise Risk Management

A captive insurance company (CIC) is an entity created by an organization to insure its uninsured or self-insured risks. As with any property and casualty insurance arrangement, premiums paid are deductible business expenses. The difference in a captive structure is that the organization pays the premium dollars to its own wholly owned subsidiary.

While captive insurance companies have been allowed by law for 70 years, until recently only the largest of companies (think Fortune 1000) had put them in place. Only now have small to mid-sized organizations begun to discover the financial and risk-management advantages of creating their own captives. Still, there are fewer than 12,000 captives among the 13 million U.S. companies employing two or more people.

The benefits of creating and operating a CIC can be very significant. They include:

  • Reduce insurance costs. Captive insurance reduces or eliminates costs often imposed by conventional third-party insurers, including coverage for comparatively irrelevant risks, and markups for things like marketing expenses and large underwriting departments.
  • Protect your business from risk. The attorneys and insurance managers who assist you in forming your CIC are experts at identifying relevant but often overlooked risks. Because CICs offer the ability to obtain tailor-made insurance, your business should be better prepared to survive the unexpected.
  • Improve cash flow. The potential savings realized by obtaining more relevant and less expensive insurance, combined with the tax savings that CICs provide, may result in significant improvements in the after-tax cash flow of your business.
  • Create profit center. Studies show that businesses that own a captive manage their risk better than third-party insurance companies, allowing CICs to have a much lower loss ratio. Captives are often therefore highly profitable. These profits can be invested in ways that generate valuable investment income.
  • Increase asset protection. Properly formed and maintained, the profits of a captive are very well insulated from the creditors of both the business and the business owners.
  • Estate planning. If your captive is owned by your children or a trust for the benefit of your children, premiums paid to the captive each year are effectively removed from your taxable estate without
    gift taxes.