How Captive Insurance Works:
Turn Risk Management Into a Profit Center These are often insurance companies and banks. It’s obvious they make signi cant pro t. When your company insures itself through its own insurance company, referred to as captive insurance, you get to keep the pro t and accumulate loss revenues for the future. A captive can help lower your net insurance premium spend. Here’s how. How a Captive Insurance Company Works
Captive insurance companies typically provide combined insurance and tax savings of 15-50% .
There’s a reason why 90% of Fortune 1000 companies utilize captive insurance.
No matter what industry you’re in, you likely pay for insurance.
Anatomy of a Captive
Insurance Captive insurance is often less expensive than commercial insurance. Captives are licensed insurance companies and have access to reinsurance markets (wholesale).
Recieve $5 Million (Insurance premiums)
And, you own the insurance company, so the premiums are paid to you—you keep the pro t after claims are paid out.
For example, if your insurance company receives $1 million in premiums, pays $100,000 in operations , pays $500k in claims and pays $200,000 for reinsurance and fronting then you have $200,000 in pro t. Taxes All or a portion of premiums are tax-deferred as loss reserves. In the above example, potentially $1 million tax-deferred * can be invested. Investment Income Invest large, tax deferred part of funds. As an example, after one year, at 5% interest, you’ve earned $50,000. Insurance Reserves Using the same example, the insurance company has $1,050,000 at the end of year one. In short, a captive does the following:
Pay $500k (Operations)
Pay $2.5 million (Claims)
Pay $1 million (Reinsurance & fronting) Profit $1 Million
Insurance
Taxes
$1 million tax-deferred* to invest
Investment Income
$50,000
Avoids sharing risk with “bad actors” Reduces or helps control insurance costs Creates investable surplus
Improves company’s bottom line Creates profit center Helps stop or limit insurance rate increases
Insurance Reserves
$1,050,000
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