How Captive Insurance Works
Understand the Process of Forming a Captive Insurance Company
As a well-established corporation or small business on the rise, having insurance can be the difference between being protected in times of loss, or more importantly, saving and even making money. Captive insurance is a business insurance alternative giving you the savings you’re looking for while also giving you the potential for profit. Here's how it works:
Essentially, you’re creating your own insurance company to save on costs. In order to start a captive, you must be willing and able to invest in your own resources and work outside the commercial insurance marketplace. Alt Risk is a helpful tool for understanding how captive insurance companies work and what types of benefits can come from being a part of a captive.
Check out our captive insurance definition for more clarification: Captive insurance companies are created and completely owned by one or more non-insurance companies (businesses) to insure that the risks of its owner(s) are covered.
How Captive Insurance Works: in 4 Simple Steps
Work with Alt Risk Captive Brokers
To begin, captive brokers from Alt Risk will assist in the formation and management of a captive that supplements as your existing insurance. There are two captive types available:
Choosing which captive to use will come down to your own preferences. In order to be part of a group captive, we recommend you team up with other businesses you know well and trust.
Set Up Your Captive Insurance Company
Your company will then buy an insurance policy from your captive to cover selected self-insured risks in exchange for a premium of up to $1.2 million each year.
- The actual amount will depend on the types and amounts of risks assumed by the captive (your company or group), and your company’s taxable income and available cash flow.
- The premiums paid by your company are a deductible business expense, received tax free in your new captive and are set by you. It’s an opportunity for you to charge yourself reasonable premiums. This is where you can really begin to save money.
Learn how captive insurance works, and how you can turn unused premiums into profits.
Invest and Accumulate Reserves
Alt Risk will begin to develop and diversify the risks placed in your captive to help generate underwriting profits and accumulate the reserves you need to have your captive to begin with.
- When it comes to accumulating reserves, it’s not something you can put off. The captive you start is treated as a legitimate insurance company by the government.
- In order to be approved as an insurance company, you must have these reserves available so if something were to happen to your company or any of the other companies in your group, there would actually be coverage.
- Captive Insurance is AN INSURANCE COMPANY. You are treated the same as an insurance company and reserves are needed. You have to file and it must be approved. The reserves must be present so if something must be paid, it can be. That’s the idea of an insurance company.
As your captive develops surplus and underwriting profits, you can access the profits of your captive insurance through dividends or liquidation. Either way, the distributions will be taxed at much more favorable rates than ordinary income taxes. These profits are then distributed at capital gains rates.
Captive insurance companies are growing in popularity and many companies report significant earnings and greater profit potential. Steady annual premiums and a positive claims record leads to a continual increase in equity balance over the life of a captive insurance plan. There are many examples of successful captive insurance companies who have turned unused premiums into profits.
What to Look Out For
Now that you have a captive insurance company, you have an insurance company that exists outside of the commercial market. This means that the IRS is going to be keeping a closer eye on you to ensure that your captive is being run in accordance to the law.
When establishing who is going to manage your captive, select an individual who you can trust to handle it correctly. If you do not take your captive seriously, try to cut corners, or attempt to find ways to work around the law, you will not be able to get away with it because of this close monitoring.
When establishing your captive, it’s important that you’re fully prepared. Make sure you go into the process fully educated on the topic. Learn more about the benefits of captive insurance and contact the captive savants at the Alt Risk Resources for any questions you have about the details of forming your own captive insurance company.
Casualty captive insurance and 831(b) captive insurance is also available. Contact Alt Risk today for more information regarding the types of captives you can establish!
Captive Insurance Benefits Make it Worth the Investment
Whether your business cannot access the financing needs for its risks, or you want better control of your risk management programs and their pricing, starting a captive may be one of the best investments you can make for your company. The benefits that come as a result of owning a captive include:
- Pricing Stability: As your captive matures and expands its risk retention capability, the greater your ability will be to protect yourself from changes in the commercial insurance marketplace.
- Increased Cash Flow: From controlling losses, safety, and improving expense factors associated with commercial insurances, your captives can see an increase in cash flow for handful of reasons. In a commercial insurance company, the gains made from invested premiums would otherwise be held by the company. Now that you have your own captive, the gains are yours to keep.
- Improved Control over Your Insurance: As the owner of the insurance company that insures your business, you will have increased control over safety, loss control, and claims administration. You will have the ability to customize these services to fit individual needs for workers, giving you the result of a safer workplace. Having control over your claims means you can better service your own company versus worrying about having a commercial insurer who might be more self-serving than you’d like.
If commercial insurances are too expensive, do not match your coverage needs, or are not available to your business, its time you consider starting a captive. With your own insurance company, you can provide coverage for your business that covers all risks and exact needs you have as long as you are operating the insurance within underwriting, actuarial, and regulatory guidelines. Alt Risk specializes in assisting companies and businesses with their captives so they can save money and gain a profit.