November 15, 2022

Insurance 101: Captives

Often, business owners and C-Suite executives are faced with exorbitant or even prohibitive insurance premiums due to the nature of their business. Major carriers may even opt out of covering an entire industry segment due to perceived high risk or historic loss costs. Captives are an effective, efficient solution for businesses who seek to control costs and can closely manage risk.

What are captives?

In its simplest form, a captive is a subsidiary created to provide insurance coverage for a business or group of businesses. In its essence, it is an insurer wholly owned by the insured.

How does a captive work?

Captive insurance companies are both owned and controlled by the insured. The insured company or companies pay premiums to the captive just as they would a traditional insurer. Captives are not excluded from state insurance regulations, and, depending on the state in which the captive is based, a certain level of reserve funds must be maintained to cover future losses. Casualty costs are covered by the captive.

Why would a company choose to utilize a captive?

It allows the company to take closer control of its coverage costs and more effectively manage risk, rather than paying premiums to a third-party insurer to bear those responsibilities. Captive insurance can provide broader protection than traditional insurance. It can also cover very specific assets and difficult or complex risk. Because the company closely controls its risk, it can avoid market-based price hikes and outside influences like inflation. There can also be additional tax benefits for companies who choose to establish a captive.

What kinds of companies are best fits for captives?

Generally speaking, those that need or want asset protection; those with sustainable operating profits of $500,000 or more; and those with a desire to reduce reliance on commercial insurance. More importantly, those businesses with unique or complex risk that are adept in risk management are excellent candidates for captive coverage. In other words, if you know your risk better than the insurance market and can effectively mitigate that risk, captives are an attractive option. They may even be profitable if losses are properly managed.

How can I learn more about captives?

Oakbridge has been helping businesses find the right insurance protection for over a century. Our captive programs are tailored to the unique needs of your business. We can help your company determine if you’re eligible for captive coverage and if captives are an effective way to protect your specific assets. We can also work with you to develop an effective risk management program so that the captive makes financial sense. Our experts will help guide you through the legal, regulatory and accounting processes necessary to successfully implement your captive program. Contact your independent Oakbridge Insurance agent for more information.