Startups and small businesses can save money and reduce risk by using captive insurance. This form of self-insurance covers risks an outside insurance company may not, creates tax savings and can offer better coverage for the parent company.
When using a pure captive, the parent company pays associated overhead and administrative costs. It also must address complex compliance issues. Because of this, large corporations tend to establish captive insurance companies. There is a multitude of types of captive companies though.
Types of Captive Insurance Companies
Ten types of captives exist, each with its own advantages. While most people think of pure captives when they hear the term, this is a much more diverse insurance concept than that. It includes:
- single parent captives also called a pure captive,
- group captives,
- association captives,
- industry captives,
- risk retention groups,
- rent-a captives,
- protected cell captives,
- micro captives,
- diversified captives,
- special purpose vehicles (SPVs).
Group and industry captives make it much easier for small firms and startups to use this insurance type. Although this may seem like a mutual insurance company, it differs. One key way is that a mutual insurance firm is owned by its policyholders. It exists for the sole purpose of providing insurance coverage to policyholders and members.
Use of these insurance firms results in tax breaks. Many companies incorporate in countries like the Cayman Islands and establish this form of self-insurance to reduce their tax burden. While they are allowed in the US now, the Internal Revenue Service watches closely for suspected tax evasion. It requires a captive user to document risk distribution and risk shifting to qualify.
Using a group or industry form of self-insurance helps startups and small businesses afford to use a tool commonly leveraged by major corporations. Your company can cover all of its risks, reduce premium expenses and save on taxes with group captive insurance.