What Is the Definition of Captive Insurance?

what is the definition of captive insurance

Shopping for insurance is nerve-wracking enough. When you're looking to cushion yourself against any loss in the future but add the term "captive", and it starts to look and feel worse. The definition of captive insurance is not as scary as it sounds. Captives have been in existence for over 100 years to mitigate and control risk, and are established, legitimate practices. 

Take a look at the following points to get a better grasp of what it entails. 

Captive Insurance Is a Type of Self-Insurance 

See? Not so scary. This is a situation in which the insurer is owned entirely by the insured. Captive insurance can cover a range of risks, and nearly every risk underwritten by a commercial insurer can also be covered by a captive. They are also used by a large number of businesses; everyone from non-profits to Fortune 500 companies utilizes captives. When a captive is created, it is subject to all the same regulations that are required for a commercial insurance company. 

It's Tailored to Meet Exact Needs 

A captive insurance company is a risk-management strategy. It gives more fine-tuned financial control to the owner of the captive than they would have if handled by a commercial insurance company. The risks that are underwritten by the captive are exact and specific to the risks that the insured needs to have underwritten. The terms of the policy are cut to fit the cloth. They meet the specific needs of the insured and in this way, they are not susceptible to the market rates and instead are responsible only for the specific losses of the insured. 

Captive Insurance Carries Financial Advantages 

There are financial benefits to establishing a captive to take care of insurance matters for a corporation. The parent company often sets up the captive insurance company in tax havens, such as those in the Caribbean, and then the parent company pays its insurance premiums to its captive. They then will try to deduct these premiums in their mother country (naturally, a higher tax locale). It goes without saying that this kind of setup provides financial advantages that many corporations desire. 

It Also Carries Financial Disadvantages 

With all the advantages listed above, the pendulum can swing the other way, as well. Before a company establishes a captive insurance plan, it ought to take into consideration certain factors. As with any other business establishment, parent companies will have administrative and other overhead costs to think about. For these reasons, larger corporations may form their captives for the perks they offer but may also rely on outside third-party insurers to cover other risks. 

Is the Definition of Captive Insurance for You? 

Forming a captive may come at an administrative cost that you perhaps would find to be more of a headache than you anticipated, however, it does have its value. Think of the definition of captive insurance as a custom-made suit that can, despite costs, also drape to your needs and quirks. Captive insurance is risk reduction essentially.

If you found this information on the captive insurance definition useful, have a look through the rest of our site! We offer many more articles on captive insurance, risk management, liability reduction and financial protection.

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