There may be great tax and business advantages for some companies to consider setting up or joining a captive insurance company that is owned or controlled by the company and other insured’s who purchase insurance or reinsurance from the captive.


For companies whose corporate structures permit, a single parent captive may be an alternative to consider for insuring the parent and its other subsidiaries.  Among other things, the captive becomes a mechanism for handling the large deductible or self-insurance layer.  The overall costs of insurance should be cheaper, because the captive will be able to save administrative expenses that are normally charged by the insurance company and built into the premium.  The captive also will be able to keep underwriting profits and investment returns that normally are retained by an insurance company.


Tax planning is particularly important in connection with the formation of a captive.  If the right conditions are met, payments to the captive are tax deductible in contract to a situation where a company might otherwise be required to accumulate after-tax dollars in reserves to fund future losses for large deductibles and self-insured layers.  Finally, a captive offers the opportunity for tax-free accumulation of reserves for unpaid losses and possible tax exemptions for small captive insurance companies.


Another great advantage is that the captive will have direct access to the reinsurance market to obtain higher policy limits at possible cheaper prices.  Companies will thus have the ability of going both to the direct insurance market with a higher deductible (funded by the captive) or to the reinsurance market in putting together their best package possible.  Also, as noted above, a company will have the advantage of taking control and handling its own claims with the substantial benefits described above.  Finally, a captive can write its own policies and design its own overall insurance program.


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