Every business, from small operations all the way up to massive corporations, share a common trait: They need insurance. The reasons for having insurance can vary, but generally, it is a way to protect the business owners as well as the assets owned by the business in the unlikely case that something might happen with negative consequences. For most smaller businesses, it is fairly easy to get a simple insurance policy for the business. However, the larger the business is, especially in the realm of large-scale corporations, it may be a little more difficult to find an insurance company that is willing to ensure the corporations for large sums of money. This is why there is an option for captive insurance, which is a type of insurance that is actually owned by the insured party. You can think of it as a corporate self-insurance.
Captive Insurance In Practice
For most people, even standard insurance policies can sound tricky, much more so when you get into the realm of captive insurance. However, it is fairly straight forward if you spend the time looking over the details. Essentially, as the captive insurance companies are owned by the company that seeks insurance, then that company, or the insured, will pay premiums to the captive insurance company. This is not simply the practice of putting money away as an emergency fund because the premiums that are paid to the captive insurance company can be deducted from corporate taxes.
Now, when a company has a captive, they essentially put themselves in an area of risk by not using standard business insurance. Think of it this way: Regular insurance companies are able to protect both the insured as well as the insurer. When it comes to the captive insurance companies, however, the only protection is that of the insured. This is not entirely a negative thing, though, as it allows these corporations to find a way to have improved cash flow and better stability in the pricing.
As you can see, one of the primary reasons companies tend to go towards captive insurance is due to tax benefits. However, by owning a captive insurance company, these businesses are able to avoid any losses in profitability that would end up happening in the case of paying standard insurance companies. With all that said, if you or your business are looking to get into captive insurance, be sure to speak with a professional who can help you get started.