Is An Insurance Captive Right For Your Business? Part 1

More than 90 percent of all Fortune 500 companies use captives, according to Forbes. Captives are popular because, when structured properly, these insurance entities can create substantial financial benefits for their corporate owners.

First and foremost, captives can provide substantial cost savings on insurance premiums for most lines of business insurance, including commercial general-liability coverage, workers’ compensation insurance, directors and officers’ risks and many others. To sweeten the pot, tax laws permit companies to deduct up to $1.2 million in insurance premiums paid to captives from their corporate tax bill.

In the ideal scenario, if the parent captive owner avoids substantial insurance claims that would otherwise drain the reserves of accrued premiums, then the subsidiary captive can accumulate substantial amounts of cash reserves from these tax-deductible premium payments.

As an additional benefit, captives can also be used to insure against unique or non-standard risks that would be too expensive to cover through traditional carriers. The captive owner obtains coverage for the hard-to-insure risk, and potentially substantial savings on insurance premiums and taxes in the process.

In recent years, more and more mid-sized and smaller companies have joined the trend, particularly due to ever-increasing costs of health insurance. Many mid-size and smaller companies have formed “medical stop-loss” captives and other self-insured plans that permit employers to pool part of their medical claims with other companies. The goal is to reduce health insurance costs through the strength of larger numbers.

Given all of these benefits, it is easy to understand the substantial value that captives provide to businesses of many different sizes. There are risks, though, and they will be addressed in my part two of “Is An Insurance Captive Right for Your Business?”

If you think an insurance captive might be right for your company, or you would simply like more information about the benefits of captives, please contact Alex J. Brown, Esq., a partner and head of the Insurance Law Group at Shapiro, Sher, Guinot & Sandler, P.A., at 410-385-4220 or at ajb@shapirosher.com.

Mr. Brown is a former Senior Counsel to the Maryland Insurance Administration and Assistant Attorney General for the State of Maryland who has substantial experience helping clients evaluate and address insurance and captive issues of all types.