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Advantages of Captive Programs
We've already discussed some of the benefits and advantages of captive insurance programs (see About Captives, Types of Captives and How They Work). Here is a summary of the most frequently identified advantages:
General Benefits Related to Captive Insurance Companies
- Provides a stable financing mechanism for selected risks;
- Federal income tax treatment is usually better than self insurance;
- Allows owners and participants to have control over the captive insurer's operations, claims administration, and underwriting decisions;
- Offers tailored insurance policies and risk management services for owners and participants;
- Offers an alternative to the commercial insurance market, leveraging negotiations and expanding alternatives;
- Enhances the risk management status of the organization;
- Captures investment income and underwriting profits;
- Encourages and provides incentives for good safety and loss control practices; and
- Creates an opportunity for owners and participants to reduce expenses over the long-term.
Pure Captive Benefits-Advantages
In addition to general benefits, a pure captive:
- Provides its owners/insureds maximum control over policy forms, premiums and payment terms, service providers, claims management, and dividend policies;
- Eliminates the risk of receiving a cancellation notice from the captive;
- Is able to provide tailored insurance policies offering broader coverage and insuring difficult risks that the commercial insurance market will not write for a reasonable price (if at all);
- Offers maximum flexibility with investments;
- Has lower capitalization requirements than group captives;
- Has access to the reinsurance market, if desired;
- Is able to provide coverage for employee benefits for affiliated entities and employees;
- Provides immediate reward for reducing losses;
- Is less regulated than are group captives and admitted insurance carriers;
- Has lower expense loads; and
- Are easier to "wind down" although captives should be formed for the long-term.
Group Captive Benefits (Association, Risk Retention Group)
In addition to general benefits, group captives:
- Create a larger pool of risks, improving the predictability of potential claims;
- Offer greater purchasing power for services and reinsurance;
- Allow insureds who don't have the financial resources to operate a pure captive the opportunity to achieve some captive benefits.
Sponsored / Protected Cell Captive Benefits
Since these types of captives are not owned by the insured, they offer the insured much less control over the captive's operations, insurance policy terms, claims administration, and underwriting decisions. However, these captives do offer the following benefits:
- Eliminate the need to provide up-front capital to form and operate the captive (however the insured will pay fees to cover expenses and capital charges);
- Captive operations are handled by third-parties, reducing administrative time requirements by the insured;
- Offer pre-arranged suite of service providers and reinsurance;
- May be able to offer highly rated admitted paper (i.e. fronting); and
- Insured's assets and liabilities are segregated from other insureds' cells (however the degree that joint & several liability is eliminated with these programs has never been tested in court).