FAQs: Captives

  1. What is a captive insurance company?

A captive insurance company is a wholly-owned subsidiary of a parent company or group, created specifically to insure the risks of its parent organization or group members. This allows businesses to manage and control their own risks while potentially reducing insurance costs and increasing cash flow.

  1. How do captives differ from traditional insurance companies?

Traditional insurance companies provide coverage for a broad range of clients and pool risks from different businesses. In contrast, captives insure the risks of their parent organization or group members only, which allows for better risk management, customized coverage, and more direct control over claims handling and loss prevention.

  1. What types of businesses can benefit from forming a captive?

Businesses with significant insurance needs or unique risks that may be difficult or expensive to insure through traditional carriers can benefit from forming a captive. Industries such as healthcare, manufacturing, construction, and transportation, as well as large corporations with diverse operations, often find captives to be an effective risk management solution.

  1. What are the potential cost savings of using a captive?

By insuring their own risks, businesses can potentially reduce insurance premiums, lower administrative costs, and eliminate broker fees. Additionally, captives may generate underwriting profits and investment income, which can be used to fund future claims or returned to the parent company as dividends.

  1. Are there any tax benefits associated with captives?

Yes, captives can offer certain tax advantages, such as the ability to deduct premiums paid to the captive as a business expense. Furthermore, underwriting profits and investment income earned by the captive may be subject to lower tax rates, depending on the captive’s jurisdiction.

  1. How are captives regulated?

Captives are regulated by the insurance department or regulatory body in their domicile (the jurisdiction where they are formed and licensed). Regulations vary by domicile and may include capital and surplus requirements, annual reporting, and independent audits, among other oversight measures.

  1. What are the initial and ongoing costs of forming and maintaining a captive?

Initial costs of forming a captive include feasibility study fees, legal and consulting fees, and capitalization requirements. Ongoing costs may include management fees, regulatory fees, and actuarial and audit expenses. It is essential to weigh these costs against the potential benefits of forming a captive to determine if it is a viable option for your business.

  1. What is the process for setting up a captive?

Setting up a captive involves conducting a feasibility study to assess the potential benefits and costs, selecting a domicile, forming a legal entity, and obtaining the necessary licenses and approvals from the regulatory body. Businesses typically work with consultants, lawyers, and captive managers to navigate the process.

  1. Can a business join an existing captive instead of forming its own?

Yes, businesses can join an existing captive, known as a group captive, where multiple companies share ownership and pool their risks. This option can be more cost-effective for small to medium-sized businesses that may not have the resources or risk exposure to justify forming their own captive.

  1. What are the risks associated with forming a captive?

Some risks associated with forming a captive include inadequate risk management, insufficient capitalization, and regulatory changes. However, with proper planning, management, and oversight, businesses can mitigate these risks and leverage the benefits of a captive insurance company.

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