Small companies have been copying a method to control insurance costs and cut taxes that used to be the domain of big business: setting up their own insurance companies to provide coverage when they think outside insurers are overcharging.
Often, they are starting what is called a “captive insurance company,” an insurer founded to provide coverage to the company, companies, or founders.
This is how captive insurers work.
The parent company (your company) creates a captive so that it has a self-financed option to purchase insurance, so the parent provides the reserves to support the policies. The captive retains that risk or pays reinsurance to bear it. The price of the coverage is established by the parent company; reinsurance costs, if any, are a factor.
In the event of loss, the company pays its captive’s claims, or the reinsurer pays the captive.
Corporate boards oversee captives and, to keep costs down, often rely on places where there is favorable tax treatment and less burdensome regulation, such as Bermuda and the Cayman Islands, or US states. USA Like Vermont and South Carolina.
Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the added ability to add various types of employee benefits has additional strategic value for captive owners.
While the aspects of employee benefits have not emerged as quickly as predicted, there is little doubt that the widespread use of captives for employee benefits is only a matter of time. While coverages like long-term disability and term life insurance generally require approval from the Department of Labor, other benefits-related coverages, such as medical stop loss, may use a captive without department approval.
Additionally, some midsize corporate owners also view a captive as an integral part of their wealth protection and asset protection plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.
A captive Best car insurance companies in Arizona would be an insurance subsidiary that is owned by its parent businesses. There are now almost 5,000 captive insurers worldwide. More than 80 percent of Fortune 500 companies take advantage of some form of captive insurance company agreement. Now small businesses can too.
By sharing a large captive, participants are insured under group policies, which provide insurance coverage that recognizes superior claims experience in the form of experience-qualified premium reimbursements and other profit-sharing options available to the insured.
A true captive insurance arrangement is when a parent company or some companies of the same economic family (related parties) pay a subsidiary or other family member, established as a type of licensed insurance company, premiums that cover the central company.
In theory, the subsidiary’s subscription earnings are retained by the parent. Single-parent captives allow an organization to hedge any risk they wish to finance, and generally eliminate the commission price component of premiums. The jurisdictions in the EE. USA And in certain parts of the world they have adopted a series of laws and regulations that allow small insurance companies other than life insurance, taxed under IRC Section 831 (b), or as 831 (b) companies.