Hidden Risk

A captive can lower the cost of insurance, but captives can also insure “hidden risk.”  Most business owners unknowingly self insure a large amount of risk. Many of these are hidden or “below the surface” risks inherent in the operation of a business.

With a captive, self-insured risks can be converted into tax-deductible premiums that are paid to a captive. Any materialized risks can now be paid with pre-tax assets.

If insurance claims are as projected, the captive will retain substantial profits that can be distributed to its owners.

CAPTIVES CAN LOWER THE COST OF INSURANCE 

A captive may reduce the cost of workers’ compensation, general liability, medical malpractice, auto liability, property, or other conventional insurance.  There are several methods available. One method, shown below, is to use the captive to retain the low severity risks, and purchase insurance from a large carrier only for catastrophic risks.

Under this arrangement, the insured business takes a large deductible. The captive then issues a policy directly to the business for the deductible (or “retention”) layer. The business then funds this retention layer with insurance premiums, and realizes both the insurance cost and tax benefit associated with financing risk through the captive.

Result More dollars retained within the business group, less premium paid to unrelated insurance carriers, and a business deduction for additional insurance expense. This approach has been used by large corporations for years to substantially reduce their insurance expense and retain underwriting profit. With the growth of the captive market, this strategy is now available to middle market companies.

Taxation