Self-insurance gives companies control over their insurance coverage for risks that are either uninsurable or difficult to insure. Captives, including group captives, offer some interesting benefits in addition to policy control.
Captive insurance companies accumulate assets. These assets back the policies the captive issues. However, only a portion of these assets must be kept available in the case of an incident or claim. Therefore, the remaining assets may be distributable to the company owners.
Captives may distribute their excess assets as dividends at a lower tax rate. They may also cash out, but the tax implications may be substantial in a cash-out scenario if they are not used for an emergency covered by the policy. Captive assets are much easier and quicker to liquidate than other financing options, however, so companies may benefit significantly from a cash out, enough that it outweighs the tax ramifications.
Parent companies are able to essentially draft their own policies. This means, their policies are specific to their business and its risk. Therefore, businesses are able to effectively cover any exposure without eliminating policy exclusions, and paying for coverage they do not need. In addition, third-parties may not have any access to the policy and captive’s assets if the policy is drafted properly.
Commercial insurance may take days or months to review and complete a claim, especially small claims. In addition, they will choose whether to litigate or settle claims, which may encourage others to file against your company.
Because the business owns the captive, it will determine whether claims are litigated or settled. In addition, as the defendant, not only can the company litigate frivolous lawsuits, but it can countersue for any legal fees or expenses if the claim is dismissed, which may discourage these types of lawsuits in the future.
The company is also able to address small claims immediately so it has time for larger claims should they be filed.
Captive insurance offers many financial benefits. Consider these benefits as you investigate captives.