Captive Insurance: It May Reduce Insurance Costs, But Is It Right For Your Business?

A discussion with Rubin Alspector, CPCU, Kornreich-NIA senior vice president and captive specialist.

Q: What is a captive insurance company?

RA: It is an insurance company that is controlled by a non-insurance entity so as to provide coverage for its business operations. The operation is similar to that of any insurance company. A captive issues policies to its insureds, collects premiums and pays claims. It must also set aside reserves to meet its legal obligations, cover its operating expenses and pay dividends to its owners and insureds. Through ownership of the insurance company, the insured can often reduce the total cost of risk financing while providing the parent company with insurance coverage that may not be available in the commercial marketplace.

Q: What types of companies should consider creating a captive to manage their risks?

RA: Companies that want to control their own destiny with respect to their insurance program. If the commercial insurance marketplace is unresponsive to their needs, or if they believe that they are being unfairly charged because of the poor performance of others in their industry. Captive candidates are companies with a strong commitment to loss control and often have claims histories that are better than other companies in their class of business.

Q: Are there other factors that can influence a company’s decision to create a captive?

RA: The attitudes of owners and their desire to control their own destiny is critical. A company and its leadership must have the intuition that they can do better themselves and must be willing to invest the time and money to create a captive for its benefits.

Q: What can a company do to decide whether creating a captive makes sense?

RA: It can work with its insurance broker and its own financial staff` to develop projections for expected loss experience, estimate the operational expenses associated with the management of the captive and determine the appropriate capital levels required to finance the legal obligations of the captive.

Q: Besides lower premiums and greater control, what are the other advantages to setting up a captive?

RA: Although we are not tax experts, we understand that there may be favorable tax implications for non-insurance companies with captives. Captives may be able to deduct premiums, defer taxation of insurance income, accrue tax-deductible reserves for unpaid claims and pay no tax on inside buildup of interest income on life insurance reserves. Consult with your tax professional for specific advice regarding taxation issues, but whatever the ancillary advantages of forming a captive, the primary role of the captive is to operate more efficiently and economically than the commercial insurance company its owners have left behind.

Q: Are there other areas of risk and responsibility where a captive can be useful to a company?

RA: It may be advantageous to companies and their employees to finance employee benefit plans with captive insurance. This includes short and long-term disability programs, retirement plans and group term life insurance. However, captives are generally prohibited from insuring or reinsuring benefit plan liabilities unless they qualify for an exemption from the U.S. Department of Labor.

For more information on captive insurance, please contact Rubin Alspector at 212-867-0070 or