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
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
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