August 05, 2014

Using a captive to insure warranty expense provides three advantages:

  1. It is a formal process to secure the funding needed to manage the risk and expose the risk to better management.
  2. Under the right circumstances, you may get a tax deduction.
  3. You might be able to reduce cost by not using a commercial carrier.

However, there are a number of disadvantages that need to be weighted:

  1. You would need to pay the entire warranty premium to the captive. So if your product offers, say, a five year warranty then you would need enough premium to cover that term.
  2. You would need to add capital to the captive to support its risk. This capital contribution does not need to be in cash. It can be in the form of an LOC.
  3. You have additional costs of running the captive.

If the warranty is built into the product price and not separately purchased, then I suggest a captive may not be worth the time. If the warranty is separately purchased by the "consumer" then a captive may be worth the time.