What Are the Financial Advantages of Captive Insurers?

Knowing about captive insurers as a concept is already difficult, even for the best insurance agents. Putting the financial aspects in perspective is like taking a 102-level class. And that’s fair for anyone who has primarily worked in the traditional market. Captives are a foreign concept for most people.

Thankfully, Captive Coalition makes understanding captives digestible for independent insurance agents and their clients. We understand captives and how they have financially benefited the best clients who have robust safety and risk management programs.

This article will help you understand the financial advantages of captive insurance, how clients see benefits, taxation, and how captives improve business profitability. That way, you and your best clients can determine whether or not captive insurers would be a good fit.

What is Captive Insurance?

Captive insurance is an alternative to traditional insurance, where its insureds wholly own and control the insurer. Captives are a long-term insurance strategy that allows businesses to earn underwriting profit and manage risk. 

They incentivize businesses to implement robust safety and risk management programs to lower the number of claims, which directly impacts their insurance costs.

How Do Captive Insurers Financially Benefit Clients?

Some financial advantages to consider with captives are:

• Customized premiums
• Improved cash flow
• Investment opportunities
• Cost control
• Enhanced risk management
• Incentives for loss control
• Increased transparency and control
• Potential for dividend payments

Before getting into the nitty gritty, you might wonder if your clients are suitable for captives. Take the captive assessment to get those results.

Customized Premiums

Industry-wide claims often influence premium costs for traditional insurers. Captives allow businesses to set premiums based on their risk profile and claim loss history. For instance, a construction company with little to no claims won't have to pay higher premiums because the industry as a whole is experiencing more claims. 

Improved Cash Flow

Businesses that manage their risks well can see significant savings. Typically, businesses with good loss experience can reduce renewal premiums by 28% in the first three years.

Captive owners can also retain underwriting profit and investment income, enhancing cash flow (assuming no change in claims experience).

Investment Opportunities

Funds that would normally go to paying premiums can be invested within the captive, offering potential growth and additional financial benefits. 

Cost Control

By managing risks directly, businesses can reduce the frequency and severity of claims, leading to long-term savings. This proactive approach to risk management can result in long-term savings and more control over insurance costs. 

With traditional insurance, a portion of every premium dollar is set aside for potential losses, with any surplus becoming the insurance company’s profit. With captives, that profit goes back to the business.

Enhanced Risk Management

Captives encourage businesses to implement more robust safety and risk management strategies. Focusing directly on the risks that matter to the business can reduce overall losses, leading to better possibilities. A healthier work environment can have a more positive impact on employee morale and productivity.

Increased Transparency and Control 

In the traditional market, business owners have no idea where each cent is allocated. As for captives, business owners see exactly how their premiums are used. This transparency leads to more informed decision-making and a better understanding of the business’s risk profile.

Potential for Dividend Payments

If the captive performs well financially, the business may receive dividend payments. These payments are a return of surplus funds, which can be reinvested into the business, used for future premiums, or distributed to stakeholders. 

Are There Tax Advantages to Captive Insurance?

There are, but it’s important to note that captives should be formed for risk management and business needs. They are a long-term insurance strategy. Entering solely for tax benefits can attract IRS scrutiny. 

Here are some tax benefits:

• Premium deductibility
• Tax deferral

Premium Deductibility

Premiums paid to a captive insurance company are usually tax-deductible, lowering the overall tax liability.

Tax Deferral

Businesses can defer taxes on underwriting profits and investment income until they are distributed, which helps with cash flow and allows for reinvestment.

How Does Captive Insurance Improve Business Profitability?

1. Focus on risk management
   • Captives encourage businesses to implement robust risk management strategies, directly targeting the specific risks they face. This minimizes the amount of claims businesses will face. 
   • Note: Even with the best and most robust safety and risk management programs, businesses will face claims once every five or six years.
     
     
2. Incentives for loss control
   • Financial incentives from captives can motivate businesses to invest in loss control measures, minimizing losses and enhancing profitability.
     
     
3. Investment Income
   • Captive owners can earn investment income on the premiums, contributing to overall business profitability.
     
     
4. Enhanced coverage and flexibility
   • Captives offer more flexible coverage options that are set to the needs of the business.

Can Your Client Have Financial Advantages With Captive Insurers?

Captive insurance offers a range of benefits, including cost control, improved cash flow, and enhanced risk management. Understanding these benefits allows independent insurance agents like you to help your clients and ensure their insurance needs will be fulfilled. 

While captive insurers have their financial advantages, you want to ensure you understand their financial disadvantages. That way, you can compare and see whether the pros outweigh the cons for your client. 

If you have more questions about captives and want to see if they are suited for your clients, schedule a call to talk to an insurance advisor at Captive Coalition.