Most professionals are required to carry a certain level of liability insurance in case they make a mistake. Many more carry a certain level of commercial coverage on business assets or areas of the business to protect from common risks. But what so many business owners don’t cover—and don’t even think about—are the intangible or less-common risks. These risks can be some of the most dangerous, not because they’re necessarily intrinsically more dangerous, but because they aren’t calculated into the equation at all.
That’s where a captive insurance company becomes extremely useful. It allows a business to create its own insurance company and hedge against risks it otherwise wouldn’t be able to cover. Let’s get some more details below.
Common business risks that aren’t accounted for
There are many risks that commercial insurance policies don’t cover—that can potentially present businesses with serious problems. A few of them are listed below:
Supply chain interruption
Data breach or loss of income
Subcontractor default liability
Key-employee loss—critical illness
Dispute resolution
Many more
Obviously, these aren’t all the risks that can be covered but this list does illustrate what one of these strategies can do to protect a business from risks that would otherwise expose owners to potential financial hardship. Making sure one or more of these risks is covered can provide the needed relief at just the right time.
What is a captive insurance company?
A captive insurance company is a small property and casualty insurance company created by a business to hedge against specific risks the business faces. Usually, it’s for risks that the business cannot obtain coverage for in other commercially available policies, but it can also be used as a way to insure common risks. The business that creates the captive insurance company owns it wholly and treats it like a normal insurance company; it pays premiums and files claims.
Premiums paid to the captive insurance company buy a policy and provide coverage for specified risks. The company is then able to deduct those premiums from its income. After a period of time (usually a year), any premium dollars no longer at risk of claim can either be kept in the insurance company’s account or distributed back to the parent company at a reduced tax rate.
Why is a captive insurance company worth looking at?
It should be fairly obvious at this point why a captive insurance company is worth looking at. The number one reason is that it allows business owners to protect their businesses from all kinds of risks—ranging from very common risks we hear about everyday, to those that you may have never even thought about without reading this. Whatever the risks are, the ability to cover those risks in an efficient manner can give you the peace of mind that you’ve been looking for, whether conscious or not.
Another major reason that captive insurance companies can be well worth looking into is the potential tax savings a business can experience by using one. Premium dollars paid to the captive insurance company are counted as a deduction for the parent company. Those dollars are then on claim for a period of time; after which, the dollars can be left in an account to grow or withdrawn at a reduced tax rate—usually capital gains rates.
Dollars left in the insurance company account can build and grow, creating a “warchest” of money that a company can keep for future use. This allows for flexibility and confidence in markets that are otherwise uncertain and scary.
Cost to Administer a CAptive insurance company
The cost to administer a captive insurance company can vary widely depending on what you’re looking at. But don’t count the idea out altogether if you’ve heard that it is generally extremely expensive. There are other options designed for smaller businesses that cost only a fraction of what some captive companies cost.
How Does VisionTree Fit Into This Process?
As financial advisors, we don’t actually administer the captive insurance company and all its associated pieces. That is handled by competent professionals that specialize in setting up and administering these types of plans. These companies have developed and perfected their process over the years and are great resources in getting a captive insurance company properly in place.
What we do is help businesses decide what to do with the money that is set aside in the captive insurance company. Most of the time, that means finding high-quality, low-fee investments that will provide the biggest return for a given level of risk. But it can also mean sitting down and discussing what the best use for the money is in the coming years to grow the business by building in the required infrastructure. Whatever it is, planning this out is well worth the time.
Contact us
Obviously, this gives only a high-level idea of what captive insurance companies are and how they work. For more information on whether a captive insurance company is right for you, contact us here or simply click “Contact” in the upper right corner of any page. We would love to sit down with you to see if a captive insurance company is right for your company.
