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What is Captive Insurance?

As you make the ascension from vendor/service provider to trusted advisor, your client will come to rely on you for advice on issues that transcend your specialty or core competency. One such example is captive insurance. Once the exclusive domain of the Fortune 1000 or S & P 500, the use of captives by smaller companies is on the rise due to changes in the Tax Code. Your client is likely unaware of the captive concept, but is painfully aware of his/her ever-increasing insurance premiums. Q: So how do you help your client with his rising insurance expense? A: Proactively raise the issue and educate him about captive insurance.

A captive insurance company is an alternative risk-transfer entity created by a parent operating company to insure the risks of the parent and affiliated groups.

A captive is an actual insurance company that issues policies, pays claims, and collects (and invests) actuarially-determined premiums. The primary purpose of a captive is to reduce the overall cost of insurance and improve coverage. The captive does this by offering coverages that are either unattainable in the market or cost prohibitive. Other benefits of a captive include:

  • Capturing underwriting profits
  • Enhancing Cash Flow
  • Greater control over the claims process
  • Customized coverages for the insured entities
  • Wealth transfer opportunities
  • Potential tax savings

Examples of risks underwritten by a captive include but not limited to:

  • Commercial policy deductibles, limits, and exclusions
  • Supplier interruptions
  • Product warranties
  • Cyber security
  • Business interruption
  • Directors and Officers Liability

Not all clients will qualify for and benefit from a captive. Capitalizing a captive as required by domestic jurisdictions can be as high as $250,000. Creating a captive, applying with the appropriate domicile, and complying with state insurance regulations can run $50,000 or more. And there are ongoing monthly/quarterly management fees for services provided by a captive manager.

If you don’t bring up captive insurance first, some other advisor will. Be proactive and talk to a qualifying client about the multiple benefits of forming a captive insurance company. You just might inoculate yourself from the marketing messages of your competitors.

Written by Bill Tsotos

Owner/Founder BD Consultants: A business development consulting firm for CPAs.

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