Captive Insurance for Small Business: A Comprehensive Guide

Captive insurance can be a game-changer for small businesses, offering a unique opportunity to manage risk and reduce premiums.

A captive insurance company is a subsidiary of its parent company, created to provide insurance coverage for the business and its affiliates. This can be especially beneficial for small businesses with high insurance costs, as it allows them to pool their risks and share costs.

By forming a captive, small businesses can also gain greater control over their insurance coverage and tailor it to their specific needs. This can be a major advantage, especially for businesses with unique risks or exposures that traditional insurance policies can't cover.

In the US, captive insurance companies are regulated by the states, with some states being more captive-friendly than others.

Captive insurance is a type of "self-insurance" where a company forms its own insurance company, owned and controlled by its insureds.

A captive insurance company is a licensed insurance company that is fully owned and controlled by its insureds, giving them greater visibility and control over premiums and claims.

Companies that form a captive insurance company can gain more control over their risks and potentially reduce insurance costs. They can also tailor coverage types and limits to address their specific and often unique or problematic risks.

A captive is typically formed for the purpose of risk management, and it can substantially lower insurance costs in comparison to premiums paid to a commercial insurer.

Companies with steady cash flow, high insurance premiums, and low claims frequency are often the best candidates for a captive program.

Here are some key characteristics of a captive insurance company:

Captive insurance companies can also provide capital for companies with a clean loss history, insulating them against risk. They can also incentivize safer workplaces and behaviors because the capital belongs to the company.

A correctly structured and managed captive insurance company can provide coverage when traditional insurance carriers are unwilling to or are demanding exorbitant premiums.

Captive insurance company owners gain greater visibility and control over premiums and claims, and direct access to additional insurance and reinsurance markets.

Companies gain greater access to and can tailor coverage types and limits that address their specific—and often unique or problematic—risks.

Here are some key benefits of captive insurance:

By using a captive insurance company, businesses can gain more control over their risks and potentially reduce insurance costs.

A captive insurance company can help improve your business's cash flow in several ways. By setting up a captive, you can earn investment income on your premium reserves, which can enhance your cash flow.

One potential benefit of a captive is the ability to withdraw funds from the account to pay for other business expenses. These distributions will be taxed, but at a lower dividend rate.

Here are some ways a captive can help improve your cash flow:

This can be a significant advantage, especially for businesses that have unique or problematic risks that traditional insurance carriers may not cover. By taking control of their risks and premiums, businesses can potentially reduce their insurance costs and improve their cash flow.

A captive insurance company can provide coverage when traditional insurance carriers are unwilling to or are demanding exorbitant premiums.

You can gain greater visibility and control over premiums and claims with a captive insurance company, and even have direct access to additional insurance and reinsurance markets.

Companies can tailor coverage types and limits that address their specific and often unique or problematic risks with a captive insurance company.

A correctly structured and managed captive can even earn investment income on premium reserves, enhancing cash flow.

Here are some benefits of a captive insurance company:

Overall, captive insurance provides significant benefits like higher capital, greater control, and broader coverage.

There are different types of captive insurance that can help small businesses manage their risks. A captive advisor can recommend the most suitable type based on the organization's coverage needs and risk appetite.

A group captive insurance company is owned by multiple organizations that share risks, liabilities, and profits. Each member's premium is based on its own loss experience, making it a controllable amount.

Group captives are often formed by organizations from the same industry, but they can also be heterogeneous, meaning members are from different industries. Operating expenses for group captives are typically lower than other captive types because the cost is shared among all group members.

A cell captive insurance company is formed by a third-party sponsor who "rents" cells to unrelated companies. Each cell's assets and liabilities are segregated from those of other cells, with each cell owner capitalizing its own cell.

Cell captives typically have lower start-up capital and ongoing frictional costs than single parent captives.

There are several types of captive insurance, each with its own benefits and considerations. A captive advisor can recommend the most suitable type based on the organization's coverage needs, available capital, risk appetite, and legislative requirements.

A group captive or association captive is a type of captive insurance company owned by multiple organizations that share risks, liabilities, and profits. This structure allows members to control their own premiums based on their loss experience.

Group captives can be homogeneous, meaning members are from the same industry, or heterogeneous, meaning members are from different industries. Each member's premium is based on its own loss experience, making it a controllable amount.

Operating expenses for group captives are typically lower than other captive types because the cost is shared among all group members.

A risk retention group is a type of group captive that offers a unique set of benefits. It's regulated under U.S. federal legislation and is licensed in one state, allowing it to operate in all 50 states on an admitted basis.

One key characteristic of a risk retention group is that it can only write liability lines of risk, not workers' compensation or property coverage. This means it's specifically designed to address certain types of risks.

A risk retention group is often used by companies that have unique or problematic risks that traditional insurance carriers are unwilling to cover. By forming a risk retention group, these companies can gain greater control over their risks and potentially reduce insurance costs.

Here are some key facts about risk retention groups:

A cell captive insurance company is formed by a third-party sponsor who "rents" cells to unrelated companies. Each cell's assets and liabilities are segregated from those of other cells.

Cell captives typically have lower start-up capital and ongoing frictional costs than single parent captives. This makes them a more accessible option for some businesses.

Each cell owner capitalizes its own cell, which means they're responsible for its own financial well-being.

A micro captive insurance company, also known as an 831(b) captive, makes an IRS 831(b) election to be taxed on investment income only, not on premiums collected. This type of captive is designed for small businesses.

To qualify as a micro captive, the collected premium dollars must be below the threshold for the given tax year. The IRS has complex rules that must be met to make this tax election, so it's essential to consult with a captive advisor.

Micro captives offer businesses a way to tailor coverage types and limits that address their specific risks. They can also provide greater control over premiums and claims, and direct access to additional insurance and reinsurance markets.

Here are some key characteristics of micro captives: