The captive insurance industry helps companies manage their risk. Although captive insurance is not for every company or professional, it may offer solutions for businesses with unique risks, such as product liability, litigation and income loss. Because they are own by their insureds, captives offer unique asset management benefits.
Asset Management and Protection
Companies pay captives premiums to cover their risks. Therefore, the money is leaving the parent company. Although it is being paid to a subsidiary, it is no longer considered a corporate asset. In addition, the full dollar amount is transfer from the parent to the subsidiary. However, if the company experiences financial difficulties, none of the business’s creditors can take assets from the captive. Because it is difficult for creditors to prove the asset transfer is fraudulent, captives protect corporate assets.
Insurance companies must have assets to back their policies. However, only a portion of the assets they receive must be retained in case of a claim against the company. Excess assets may be use to finance the recovery of a catastrophe, such as an ongoing recession, but the firm may have to pay significant tax on any money they withdraw from the captive. If it is a matter of saving your business, however, the advantages may far outweigh the disadvantages of cashing out.
Self-insurance requires that businesses use their resources to cover unexpected losses. However, the company may not have enough assets readily available to cover these losses, which may affect the stability of the business. Captive insurance allows owners to manage their risk by setting aside assets, through paying premiums, because captives must hold enough assets to cover their outstanding policies. In this way, they act as holding companies that retain assets in case a claim is made against the company.
Companies can improve their asset management through the creation of captive insurance companies. Consider these benefits as you investigate captives.