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Wednesday, May 23, 2012
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One of the biggest challenges facing businesses today is risk management. A tool that risk managers need to consider is a captive insurance company.
The benefit of a captive insurance is that it allows a company to manage risk itself rather than depend on a commercial carrier. Standard risk management policies such as product and property liability coverage may not cover hidden risks such as loss of a key customer, supplier or data; theft or forgery by an employee; or breach of data, among others.
Once formed, the captive insurance company functions the same as a traditional insurance carrier, issuing a policy and receiving premium payments from its parent company.
What is captive insurance company? Is a subsidiary company created to serve as an insurance carrier for the parent company. In essence, it is a way for the parent company to become self-insured.
What are the benefits of creating a captive insurance company?
The primary benefit of a company is to guarantee that the type of risk management coverage needed by the parent company is available. It avoids the possibility that a commercial insurer may withdraw from the market, leaving no coverage available.
Other benefits include:
*The parent company is able to control the cost of its insurance premiums.
*There is no automatic increase in premiums, as is often the case with a commercial carrier, so it stabilizes the insurance budget of the parent company.
*Premium payments are a tax deduction for the parent company but are not taxable to the captive.
*The captive insurance can re-invest the premiums collected under guidelines that are broad and flexible.
*The parent company can insure all or some of its risk with the captive.
How do you determine whether a captive insurance company is the right strategy.
There are no specific criteria to determine whether a company should create an insurance company, but there are some guidelines.
Good candidates for creating a captive insurance include:
*A business that has substantial self-insured or uninsured business risk. The greater the risk, the more important coverage becomes.
*A company that has significant third-party insurance expense. Paying premiums to a subsidiary is a way to retain the wealth of the parent company when no claims are submitted.
*A company that has a good historical loss record. Coverage through a third-party carrier is subject to annual premium increases, regardless of a company's claim record.
*A company in an industry that has little or no third-party insurance available for that industry. A captive insurance company guarantees coverage is available.
*A company that has more than 25 employees. The more employees a company has, the greater the chance for employee crimes to occur.
There is a fair amount of information found on the internet concerning the features, benefits and logistics of forming, funding and operating a captive insurance company. This is due in large part to the need for interested parties to assimilate large bodies of information quickly and multimedia (such as video) helps meet that need.
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