In recent months, captive insurance companies have come to the forefront of the insurance industry. And as a result, there has been increased interest in what they are and in what benefits they provide, as well as questions about whether they are a viable option for companies.

For large builders, manufacturers, distributors and trucking companies, captives are becoming more and more widespread thanks to increased industry awareness.

What Is A Captive?

A captive insurer is a privately held insurance company, one that can be a subsidiary of a business that it insures. It issues policies, collects premiums and pays claims just like a commercial insurer; however, it does not offer insurance to the public.

While a captive can be a great financial tool, it will not work for every business. In order to create and operate a successful captive insurance program, the operating company must generally have a substantial amount of risk. That risk can be insured commercially, or it can be self-insured by the business. If a particular area of risk is already insured, then the business may elect to cancel its current commercial policies and insure those risks with a captive. If the risk is already being self-insured, then there may be certain benefits of financing that risk via a captive. Other characteristics that make a business more suitable to a captive insurance scheme are when it has:
Profitable operations, with taxable income ranging from $1.5 million to $100 million;
Self-insured or uninsured business risk of $250,000 or more;
100 or more employees; and
Commercial insurance expense of $500,000 or more.

The Internal Revenue Code, related IRS rulings and case law all allow the use of captive insurance companies to manage risk. When properly employed, a captive insurance strategy can help a business owner better manage his or her insurance costs, control claims, accumulate surplus in anticipation of unforeseen business problems or catastrophes, and accumulate wealth with tax advantages.

Even if the company meets the money criteria, how does a business owner know if his or her business is really suited to a captive?

Looking At Risks

The first step for a business owner, regardless of industry, is to take a closer look at the overall risk that your business faces. You should examine risks that are typically insured by commercial property and casualty insurance and consider risks that are already self-insured. A good place to start is by carefully reading your property and casualty insurance policies. This will allow you to see what is covered and what is not. In fact, most policies exclude potentially catastrophic business events such as a product recall or construction defect.

Once you have taken inventory of the various risks, you must assess each one and determine a strategy to address it. For example, certain risks cannot be insured in the commercial marketplace and others must be insured, such as worker's compensation, which is a requirement in many states.

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