Captive Insurance
Is This Traditional Insurance Alternative Right For Your Business?
What is Captive Insurance & Why is it Growing in Popularity?
Captive insurance is a form of self-insurance where a business creates its own insurance company to cover its risks. Unlike traditional insurance providers, which operate as third-party entities, a captive insurance company is wholly owned and controlled by the insured. This structure allows businesses to tailor their insurance coverage to meet specific risks that may not be adequately addressed by conventional insurance policies. Not all companies can qualify to be part of a captive, but for those that do, it may provide significant benefits.
One popular option is 831(b) captive insurance, which allows small insurance companies to be taxed solely on their investment income, provided their annual premiums do not exceed $2.65 million. This can result in substantial tax savings and is designed to help small businesses manage risks more efficiently.
Read on to learn more about the nuances of captive insurance, how it operates, and who stands to benefit the most from this innovative model. Feel free to give me a call to discuss personally if captive insurance is a good option for your business.
Call 330-464-6924 to speak with Tom Brenner, principal & Commercial Risk Advisor with the Hummel Group.
Benefits of the Captive Insurance Model:
Cost Savings
Risk Retention
Increased Focus On Loss Prevention
Tailored Coverage
Access to Reinsurance Markets
Flexibility in Capital Allocation
Control Over Claims Handling
Tax Benefits
Long-Term Stability
Experience The
Hummel Difference
How Does Captive Insurance Work?
A captive insurance program works by allowing a business to create its own insurance company to cover specific risks. The business pays premiums to the captive, which is owned and controlled by the parent company. This captive can develop customized policies tailored to the company's unique needs, handle claims directly, and retain any profits or unused premiums. By doing so, the business gains greater control over its insurance costs and risk management strategies.
One of the significant advantages of captive insurance is the potential tax benefits. Businesses can deduct premiums paid to the captive as business expenses, reducing taxable income. Additionally, under Section 831(b), small insurance companies can elect to be taxed only on their investment income, leading to substantial tax savings.
Captive health insurance can be particularly beneficial for companies that have implemented effective risk management strategies. By pooling resources and sharing risks, businesses can achieve more stable and predictable healthcare costs compared to traditional group health insurance.
Disadvantages of Captive Insurance: While captive insurance offers numerous benefits, it also comes with certain disadvantages. These include the need for significant capital investment, complex regulatory compliance, and administrative responsibilities. Additionally, there is a risk that the captive may not perform as expected, potentially leading to financial losses.
Are you interested in learning: how to form a captive, who manages a captive insurance program, types of insurance captives, or learn about captive insurance examples? Click here to learn more about the inner workings of the captive insurance model.
As captive insurance providers, Hummel Group wants to show you how you can create captive insurance for your company.
A New Horizon Awaits
Learn how shifting your perspective on risk management delivers tangible results to you, your company and your employees!
Who is a Good Fit for Captive Insurance?
Captive insurance is not a one-size-fits-all solution, and certain characteristics make a business a more suitable candidate for this model. Here are some key indicators that a company might benefit from establishing a captive insurance company:
- Significant Insurance Costs: Businesses that face high insurance premiums—especially those in industries with higher-than-average risks—may find that a captive can reduce costs and provide better coverage tailored to their specific needs.
- Stable Loss History: Companies with a stable or predictable loss history are better positioned to benefit from captive insurance. A consistent loss record can lead to lower premiums and a more favorable risk profile.
- Desire for Control: Organizations looking for greater control over their insurance programs and claims processes will find captives appealing. This control can lead to improved risk management strategies and enhanced responsiveness to claims.
- Complex Risk Profiles: Businesses that operate in sectors with unique or complex risk exposures—such as construction, healthcare, or technology—may benefit from the customization that captives offer.
- Long-Term Perspective: Captive insurance is most beneficial for companies willing to make a long-term investment in risk management. Establishing a captive requires an upfront commitment, but the long-term benefits can outweigh initial costs.
- Regulatory Understanding: Companies must have the resources to navigate the regulatory landscape associated with captive insurance. This includes understanding the legal requirements in their chosen jurisdiction, as well as ongoing compliance obligations.
- Financial Stability: Businesses considering a captive should have a strong financial foundation, as captives require capitalization and ongoing funding to survive and thrive.
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Tom Brenner
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We're in the business of trust-building, not selling policies.
When it comes to insurance for your business, your Hummel risk advisor is going to provide you with a custom-tailored plan that's best for you, not our company.
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If you need to submit a claim, you get one of our full-time claim specialists to advocate for you with the insurance company and support you through the entire process, step-by-step.
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