Let’s Define IRS Captive Insurance
A captive is an insurance company that is licensed and fully owned by its insureds. This type of “self-insurance” allows the owner to invest their capital and resources and assume a portion of the risk. A “reinsurance” company assumes the balance. Although this can increase the risk of large claims, it can also help to save premiums on small claims, as the company keeps the money that would have been paid to traditional insurance companies. Captives and Reinsurance Companies often have a smaller range of coverages and less binding regulations than traditional insurance companies. This makes them appealing to companies with unique vulnerabilities that traditional insurers don’t cover.
Why It’s Beneficial
Captives are often formed to manage risk. Captives can help businesses save substantially on insurance premiums compared to commercial insurers. They can also provide coverage that is not available or unobtainable in the private sector. The parent company has greater control over the claims process and can obtain more tailored coverage for company risks. Additional benefits include:
Capital: A company that has a clean loss history may still face increased premiums from a commercial insurance company due to a poor investment market, or because of the volume of claims the insurer is processing. A captive that is well managed can be profitable and protect against risk.
Control: Captive insurance gives companies more control over safety, loss, and claims administration. Because the capital is owned by the company, the captive model encourages safer workplaces.
Coverage: Companies with a poor loss history or who operate in high-risk industries may not be able to obtain coverage on the open market. Captive insurance is a type of insurance that can be tailored to meet the company’s specific risk exposures.
So Who Uses it?
A company with high insurance premiums, steady cash flow and low claims frequency is the best candidate for a captive plan. Captive insurance is also suitable for companies that want to consolidate their enterprise risks such as worker benefits, healthcare, and workers’ compensation.
Companies with:
Leaders who need or want asset protection.
Profits from sustainable operations of at least $500,000.
They want to lessen their dependence on commercial insurance.
A diverse workforce with different medical preferences and needs.
If your company is looking to protect itself against risks that the commercial insurance market cannot cover, IRS captive insurance might be a good option. Properly designed policies can offer many benefits and reduce your company’s risk exposure.
Larson & Company are experts in the IRS captive insurance field.
