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Insurance companies need insurance, too. When it comes to reinsurance and the process of cost-savings for insurance companies, getting the right risk coverage is vital.

Captive insurance exists to help mitigate common pain points of reinsurance. If you’re curious about captive insurance, take a look at this helpful guide and learn more.

What Is a Captive Insurance Company?

Captive insurance companies are wholly-owned subsidiaries formed by insurance companies. These subsidiaries operate under parent companies to provide commercial insurance or reinsurance. Companies work with subsidiaries if they can’t find ideal insurance plans or need niche coverage.

Captive Insurance Benefits

Working with a captive insurance company has cost-effective benefits that are worth looking into. Firms should consider these major benefits when comparing insurance options.

Cost-Effective

Captive insurance companies gain better tax rates. They also cost less than average insurance coverage options because of lower overhead costs. Plus, they’re not subject to market volatility and have better resources for niche risks. Companies also enjoy reduced administration costs.

Niche Coverage Options

Captive insurance companies often provide more niche and customizable insurance coverage options. These niche options are ideal for businesses that are looking for a cost-effective plan that only covers what they need. Companies also gain access to reinsurance markets and special government coverage.

Captives also give companies the freedom to try options that are otherwise not ideal or readily available. For example, a company with a very niche risk may not find reliable coverage due to a lack of interest. Captives offer a way to gain coverage without risk despite a lack of demand.

Risk Management

Captives offer better risk management for insurance companies. Since captives respond better to market volatility, the options for risk management are much better. Risk management through a captive is also less likely to experience drastic price changes.

Types of Captives

It’s important to understand the captive distinctions and characteristics before working with one. There are two important structures of captive insurance subsidiaries to consider.

Pure Captives

A pure captive is a subsidiary of a single parent company and provides coverage for that company. This structure is the most common type of captive and provides insurance directly. These captives also offer reinsurance options. Pure captives protect the parent company and allow operational risk coverage.

Group Captives

A group captive is a subsidiary owned by several unrelated parent companies. This type of structure is helpful for insurance companies that can’t afford to create a pure captive on their own.

Group captives exist for cost-savings purposes, as coverage prices are much lower than average market costs. Operating costs are also much lower. Parent companies work together to provide ideal coverage plans they couldn’t provide alone.

Knowing Your Insurance Options

Understanding captive insurance is the first step towards better risk management. The benefits are alluring, like better tax rates to lower coverage costs. Plus, working with a captive company leads to long-term growth and cost-savings.

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