What Is Captive Insurance?

There are many different types of insurance that a company needs for legal and financial reasons and almost as many ways to get that coverage, including group captives. Before you start looking into captives for your business, it is a good idea to know some basics about this insurance type as well as what the benefits and risks are.

Basics

By definition, a captive insurance group is a collection of like-minded companies who start a wholly-owned subsidiary insurance company that provides services in risk-mitigation for the alliance. This can help your business find the right industry-specific insurance coverage for your risks, meet the legal requirements for insurance for less cost, and receive dividend-based benefits for safety practices. Your company can start a captive on its own or with a group, either way, you are taking on more risk and responsibility than with traditional insurance plans and receiving more rewards.

Benefits and Risks

Some of the benefits of a group captive include spreading risks among all the members, lower costs and more control over insurance choices and management. This means you can have a say in who is admitted to the group, what coverage looks like and which counsel is retained for claims. It also means that you can get dividends from the captive at the end of the year and do not have to pay for an insurance company’s expenses and profits. If multiple group members have bad years, however, you could risk substantial and unaffordable expenses.

Companies in some industries are harder to insure through providers than others and many businesses will form group captives to find needed coverage or lower the costs of premiums. This type of insurance involves creating or joining a collection of companies with a subsidiary insurance company, giving you more control over management, costs and coverage.