Through a captive insurer, a company or a group of companies such as an association can retain premiums and underwriting profits. As commercial insurance companies build in margins for underwriting profit as well as for policy and claims administration, these costs can be retained by the captive. In addition, a captive manager may be able to price the parent company’s risks being ceded to the captive more competitively. One reason for this is that the captive manager will be closer to the risks involved, as opposed to simply having to rely on a proposal form.
Commercial insurance companies may not be able to meet all of the needs of captive users. Coverage may be too broad or too narrow to adequately meet the company or group’s requirements. Having a captive insurance company allows captive users to tailor-make their insurance product design in line with their own unique requirements.
Tax considerations will vary according to the domicile of both the parent company and the captive, but can form part of an overall integrated tax planning strategy.
Simplification of Risk Transfer
Companies with different types of risks in different locations may often purchase insurance from local providers. Having a captive can create a one-stop shop for its insurance can save premium and enable the captive user to allocate a set deductible for each risk or territory.
Access to the Global Reinsurance Market
Having a captive allows captive users to access the global reinsurance markets. Since the captive is an insurance company, the captive insurance company can be reinsured in these markets where profit margins are often less than would be required by individual risk insurers.
Risk Management Expertise
If it does not already exist already, risk management expertise can be developed and deployed to individual territories and risks.
Centralised Risk Management
Using a captive can enable captive users to better focus on their risk exposures and the causes of losses. Risk management techniques and recommendations can then be passed down to operations from a central source.
Establishing a new Profit Centre
Having developed its expertise for a particular class of business, established an infrastructure to process policies and claims, the captive may decide to offer insurance to other similar companies with the benefits of more appropriate insurance coverage and risk management advice.
Also in this section
Reasons to Set Up a Captive Insurance Company
Performing a Captive Insurance Company Feasibility Study
Different Types of Captive Insurance Company
Selecting a Captive Insurance Domicile and Captive Manager
Reinsuring Captive Insurance Companies