Today's post is co-authored by Managing Directors, Eustis Corrigan and Lloyd Grissinger. Together, they offer insight into the captive insurance segment of the insurance industry. Learn more about structuring your own risk financing, including the reasons companies choose to establish captive and the effects captive will have on your taxes.
Organizations today have a wide variety of choices when structuring their risk financing arrangements. In the past 60 years, a significant portion of all U.S. commercial insurance premiums have moved from the traditional insurance market into the captive insurance segment of the insurance industry. From purchasing first dollar insurance to joining, or creating, a captive insurance company arrangement, the options available tend to favor a financially efficient model that matches the risk appetite.
What is a captive insurance company?
A captive insurance company is an organization formed to provide insurance coverage to their owners or affiliates (policyholders). Captives are established in specific geographic locations (both domestic and foreign) to take advantage of resident services and favorable regulations. It provides mid-sized companies the potential to create significant savings in its costs of insurance.
What are the reasons companies choose to establish a captive?
What are the typical captive programs?
- Workers' Compensation
- General Liability
- Professional Liability
- Directors' & Officers' Liability
- Credit Risk
- Other Enterprise Risks
What are the potential drawbacks of a captive?
- Initial capital requirements and upfront fees
- Underwriting losses
- Reduced diversification
How does a captive affect my taxes?
For federal tax purposes a captive is oftentimes classified as a "C" corporation. The taxability of the earnings and profits of the captive for federal tax purposes will depend on the amount of premium income and investment income generated on an annual basis.
Clearly, deciding whether or not to utilize a captive is tricky. Becoming a captive participant may be profitable or fraught with an unacceptable degree of risk. Our National Captive Practice Group can help walk plan sponsors through the analytics so they can make an informed decision regarding whether or not to make the move to a captive.
To read more about the risks and rewards of health care captives click here.
Learn more about how using captive structures can help you manage risk, reduce insurance costs and achieve your estate or succession planning goals. View the CBIZ SlideShare Presentation.