Cost Control
The most effective method of controlling your insurance costs as you benefit from optimum coverage is to retain part of the insurance risk within your company.
With your captive, you can realize cost savings and revenues through:
Lower overhead costs than a commercial insurer's, allowing a larger percentage of the premium to be used for claims payments.
Retention of underwriting profits and investment income that would otherwise go to the commercial market.
Accessing the reinsurance market, which operates on a lower cost structure than direct insurers.
Earned investment income on unpaid loss reserves.
Premiums based on your own company's loss experience, not on industry-wide loss standards.
Tax advantages (depending on the captive's location and the domicile of its parent).
Stability of the Price Cycle
The cost of insurance is cyclical and volatile. It's based on insurance industry factors that may be irrelevant to the risks your company needs to insure. Since commercial insurance companies spread their risks, your company may be paying the same high premiums as another company, even though your loss ratios are lower.
This is strong incentive to establish a captive. By doing so you stabilize your cost of insurance and assure that your premiums are determined by your company's own loss experience, not by an industry-wide standard.
As a licensed insurance company, your captive will have direct access to the worldwide reinsurance market. Your company can obtain more competitive wholesale premium quotes than primary insurers.
The cost of purchasing reinsurance in the wholesale market is less than the same insurance in the retail market. Reinsurers readily work with captive insurance companies - especially those that are well managed, adequately capitalized and have good risk management programs.
Optimization of Your Risk Management Program
Captives enable parent companies to design a program to meet specific needs. You can include risks that may be currently uninsurable or cost prohibitive. And, the risks you select to retain through your captive will be based on your unique loss profile.
Coordinated risk management allows the parent's entire corporate family to benefit from group funding of a captive through consolidation of coverage, centralization of administrative support, and overall reduction of insurance expenses.
Greater Capacity and Independence
As your captive matures and realizes increased capital and surplus, it will develop a greater capacity to retain risk. Increased surplus can create new opportunities for accessing reinsurers and entering pooling arrangements. The parent company can evolve toward greater independence from the commercial market.
Coverage Availability
Sometimes adequate insurance is simply not available, or acceptably priced, in the commercial market. Your captive can provide coverage designed specifically to meet your company's needs.
Enhanced Focus
By forming your own captive you can reduce the cost of services. You'll also focus the reinsurance management, claims processing, and loss control services toward your specific needs.
With this heightened cost cutting and risk management focus, you demonstrate managerial foresight and financial sophistication. It enables executive management to recognize and reward good risk management and loss prevention programs of the subsidiary companies and allocate the costs to each insured company.
Broader Investment Income Opportunities
Through your captive you maintain control of premium payments and direct the management of those funds according to your company's investment strategy. This lets you maximize the yield on the portfolio and structure the maturities to meet your cash flow requirements. The captive can grow into an important profit center for the company
Approximately 5,000 captive insurance companies have been established by a wide variety of U.S. and multinational companies and associations. By doing so, they've been able to take advantage of cost savings, as well as product and service options not available through commercial insurance.
By establishing your own captive your company can realize Reduced Costs, optimized its Risk Management program and provide Greater Flexibility to meet the corporate family needs.
