With insurance carriers cutting capacity and substantiallyincreasing premiums, insurance buyers are considering alternatives to their traditionalrisk management programs. Insurance captives are one of the more popular alternativesto consider, although they are not right for every insurance buyer. Thefollowing reasons have contributed to the increased popularity ofcaptives.
Cost Savings and Control: Captives can potentiallylower insurance costs compared to traditional insurance. By insuring themselvesthrough their own captive, businesses can reduce their reliance on commercialinsurers and the volatility of the traditional insurance market. This allowsfor more predictable costs and direct access to reinsurance markets.
Customized Coverage: Captives provide a way forbusinesses to secure coverage that may be unavailable or unaffordable on thetraditional market. This is especially relevant for unique or emerging risksthat standard insurers may not be willing to cover.
Risk Management: Captives encourage better riskmanagement because as businesses assume more of their own risk, they have agreater incentive to control and reduce it. This proactive approach can lead tosafer practices and a reduction in claims.
Direct Access to Reinsurance Markets: Captives candirectly access reinsurance markets, which may offer more favorable terms andconditions compared to commercial insurance. This can result in improvedcapacity and pricing.
Tax Benefits: Under certain conditions, the premiumspaid to captives may be deductible as business expenses in some jurisdictions.However, tax should not be the primary reason for setting up a captive, andcompanies must ensure they comply with all tax regulations to avoid issues withtax authorities.
Asset Accumulation and Income Stream: Captives canaccumulate underwriting profits and investment income, which can besignificant. This can turn into a new income stream or be used to financeinternal projects or loss prevention initiatives.
Increased Capacity for High Deductibles: Businessesthat choose to take on high-deductible plans to save on insurance premiums canuse captives to fund those deductibles, giving them more capacity to managecash flow in the event of a loss.
Market Instability and Hardening: In periods when theinsurance market is hardening—meaning that premiums are increasing, andcoverage terms are becoming more stringent—captives can offer a more stablealternative. The volatility in the traditional insurance market, partly due toincreased claims from natural disasters, cybersecurity issues, and other globalrisks, has prompted businesses to look for more stable solutions.
Globalization of Business: As companies operate on amore global scale, they may face a variety of risks in different markets.Captives can be structured to provide a global insurance solution that istailored to a company's specific geographic risk profile.
Regulatory Developments: Some jurisdictions havedeveloped more favorable regulatory environments for captives, lowering thebarriers to entry and making it easier and more attractive for companies to setup their own insurance subsidiaries.
These factors, combined with a growing recognition of thestrategic value of captives in an overall risk management program, havecontributed to their increased popularity. However, it's important to note thatcaptives are complex structures that require careful management and are notsuitable for all businesses. The decision to form a captive should be made withcareful consideration of the specific needs and capabilities of the business,as well as a thorough understanding of the regulatory and financial implications. Contact Koru to learn more about captives andwhether they are right for your business.
