Insurance is a major expense for many organizations. Businesses are cutting expenses by moving to remote work options and reducing capital expenditures, and another way companies are mitigating risk and reducing expenses is by re-evaluating their insurance approach. Business entities are re-discovering a mature insurance approach called captive insurance. So, what is this type of insurance and how might it benefit your organization?
What Are Captive Insurance Companies?
A captive insurance company is a wholly-owned subsidiary of one or more businesses that are created to insure its owner. Captive insurance companies spun up in the 1950s but really took off in the economic boom of the 1980s. Captive insurance companies gained traction in the eighties as a free-market response to the challenge to obtain varying types of liability insurance. Today, according to the National Association of Insurance Commissioners (NAIC), captive insurance companies are commonly deployed in the manufacturing, construction, real estate, and finance sectors. Companies leverage these insurance subsidiaries as a method to finance risk and attempt to make a profit in the process as opposed to paying out premiums to a third party.
How Does Captive Insurance Work?
Just like any insurance property, this alternative form of insurance is primarily designed to manage risk for an organization. Whereas commercial insurance companies are slow to react to the market and thus unable to produce a wide array of coverage necessary to effectively protect some organizations, captive insurance allows the company to manage its own risk. A captive approach can be both cost and tax-effective.
Setting up a captive requires building a proper legal structure, a strong understanding of risk and actuarial science, and the challenges of any startup venture. The controlling owner must cover the loss should any occur, which is where partnerships can come into play to mitigate the risk associated with large-loss scenarios. Just like a typical business, a captive insurance approach attempts to generate a profit and uses risk analysis in an attempt to do so. As is typical in any investment strategy, the more risk assumed the greater the potential reward. Captive insurance benefits can include significant tax breaks, especially for those in the construction industry assuming its risk.
Should Your Business Consider Captive Insurance?
Construction, real estate, manufacturing, and financial industries are the primary candidates for captive insurance. More specifically, organizations in these industries should qualify themselves by these additional characteristics:
- Financial stability and strong financial planning
- Sufficient balance sheet reserves
- Solid risk management practices and infrastructure
- Ownership of global operating entities with thorough risk disbursement
About Haughn & Associates
Founded by Michael Haughn in 1986, Haughn & Associates is a full-service, family-owned, independent insurance agency based out of Dublin, Ohio. H&A strives to provide the best possible price and unique insurance solutions across a myriad of industries, including construction, IT, Habitation & Commercial Property, Agriculture, and Engineering. Devoted to providing the best of business insurance, life and disability insurance, personal insurance, employee benefits, and bonds, H&A is proof that success lies in long-standing client relations and satisfaction. To learn more about how H&A can be of service to you, contact us at (877) 802-2278.
