Captive Insurance Explained

Captive Insurance Explained

Most people are content to use traditional insurance policies provided by old-fashioned insurers. If not, then at least they resign to the fact that there is no other option.

However, there are other choices for insurance that may appeal to certain people seeking insurance policies that better suit their needs, or offer additional value. Captive insurance could fall into this category. It is for anyone interested in going off the beaten path.

If you have already made wise financial decisions like setting up accounts with a reputable trust company in Anguilla, perhaps you are the type of go-getter who seeks captive insurance. You just need to understand the potential risks and rewards before you make a decision.

What is Captive Insurance?

The first thing you need to know is that this type of insurance exists when the insured owns the company. In other words, every policyholder is an owner of the insurance company. They grant some measure of control and decision-making ability, and able to share in profits. Unfortunately, they also share in any loss.

This is opposed to commercial insurance, where the company sells a product (i.e. policies). The clients choose the product that most closely suits their needs, and the company earns profits. Captive insurance allows those it insures to tailor policies to their particular needs as long as the captive operates within sound actuarial and regulatory guidelines.

Potential Rewards

Perhaps the best thing about captive insurance is that it offers the opportunity for the insured to create policies tailored to their personal needs. Since traditional insurance companies offer only policies that are ill-suited and overpriced, captive insurance could be the best solution.

There is also potential for greater earnings. Captive insurance companies have far fewer expenses than traditional providers. Price stability is achieved over time as the captive matures and expands risk retention capability. Therefore, even though they often start with less capital, they have greater latitude to invest and earn. Plus, underwriting profits go to owners, which in other words, is you.

Potential Risks

Captive insurance has many potential rewards, but there is also a risk factor. Those insured under its policies are owners of the insurance company. This is based on investment. If there are no claims against these policies, a surplus will grow and owners will earn money through underwriting costs.

Significant claims can put investment funds at risk. On the upside, captive insurance companies generally start by reducing underwriting costs before dipping into a surplus. In addition, the inherent obligation to limit losses means that the companies generally have a greater focus on safety and risk reduction than the average commercial insurance company. However, the old adage “no risk, no reward” aptly applies to captive insurance.

In short, captive insurance is about professionals e.g.Investors, lawyers, doctors, nurses etc. pooling together to sustain or dampen the effects of losses mainly due to litigation.

For more information on Captives and how to form them, ask us today at First Anguilla Trust Company Limited.

Benefits of Captive Insurance Companies

Benefits of Captive Insurance Companies

captive insurance
Over the years, large companies have enjoyed all the benefits they reap from having their own captive insurance companies. Generally these are used when insurance was not available, or was unreasonably priced. Depending on the nature of the company, sometimes other companies are not willing to insure you due to risks you might be taking. But not only are there risk management benefits, but there are also tax advantages.

In more recent years, smaller companies have come to learn they can benefit from captive insurance companies, as well. Here are some of the benefits that a well managed captive insurance company can provide:

  • The parent company receives a tax deduction for the insurance premium paid to the captive
  • Other tax saving opportunities, including gift and estate tax savings for shareholders and income tax savings for the parent and the captive
  • The opportunity to accumulate wealth from a tax-favored vehicle
  • Favorable income tax rates for the distributions to captive owners
  • Asset protection from claims of business and any personal creditors
  • Lowered insurance premiums presently paid by the company
  • Accessibility to the lower-cost reinsurance market
  • Insuring risks that would otherwise be uninsurable

Before you get too excited about being covered, keep in mind that some companies forget that captives need to run as a true insurance company. It is best to have a capable captive management company on your side in order to make sure that everything goes smoothly. If you are in need of a Captive Insurance Company, contact First Anguilla Trust and we can help all of your insurance needs.