What Is A Captive Insurance Company?

resourceful and innovative

Captive insurance companies are known for their ability to improve long-term and general overall profitability for businesses. In estate planning tax issues, a captive is frequently an excellent choice for those who own a substantial business. Wealth transfer can in many cases be best managed through the resourceful and innovative use of captives. So what are captives or captive insurance companies?

Risk management

A captive designated insurance company is simply a C-Corporation that is intended for the express purpose of writing insurance for a specific group or entity that is to be insured. The primary advantage of utilizing a captive is that it is effective in managing risk in a more defined way. Something known as a single parent captive is perhaps the most common in use today.

Why would a business create a captive insurance company?

The main goal of a captive is to insure risks for the parent company in question. It can also be instrumental in insuring the risks of employees and even subsidiaries. It may be implemented and managed in such a way that it becomes a subsidiary type of company. When a company finds that it requires more effective risk management as related to “property and casualty” types of risks, a captive is arguably an excellent choice. Below are listed eight key reasons why a business would move forward with creating a strategic type captive.

1.    Tax Efficiency

Tax efficiency is always a major concern today. A captive has the unique ability to compound tax-deductible reserves over time. This is the case for known or even estimated unpaid claims.

2.    Better Management Of Cash Flow As Related To Self-Insured Expenses

In many instances, a single parent type captive can be used by a parent company to transfer specific types of P&C risks over to the captive. This is especially true with regard to certain types of risks that would otherwise be self-insured by the parent company. In many cases this allows the parent company to enjoy improved cash flow management. While it is true that a sinking fund can be used to cover risks associated with self-insurance related risks, the parent company can pay premiums to a captive as a way to better manage risks while allowing for those payments to be deductible.

3.    Accessing The Reinsurance Market

One excellent use of captives is to gain access to something known as the reinsurance markets. This helps to provide for increased limits as well as protecting surpluses. In addition, a captive may collaborate with other carriers that are of a traditional or legacy nature in order to issue various types of policies requiring “A” rated type paper.

4.    Gaining Access To Coverage That Would Otherwise Not Be Available

There are various types of risks associated with the retail market that are not transferable. Captives can make available coverage for these types of risks in a way that would otherwise not be possible.

5.    Balance Sheet And Cash Flow Protection

Legal action and legal claims can jeopardize cash reserves held by a parent company. By having assets and reserves dedicated to a licensed and regulated type entity, a company can maintain better control of its finances and its overall risk management. A carefully implemented captive program can be exceedingly effective at protecting a company's balance sheet, assets and general cash flow.

6.    Securing Higher Quality Property And Casualty Type Coverage

One of the most striking examples of the benefits to a parent company with regard to a captive is that the parent company is able to custom craft policies as necessary. Further, a captive is able to make available certain types of coverage that would simply not be possible in a traditional market. In short, this unique and innovative product can make available coverage to a corporation or company that would otherwise not be offered or affordable.

7.    The Advantage Of A Favorable Claims Type Experience

A company can benefit from the profits realized through utilizing a captive rather than a third party benefiting in this way. It should be noted that the entity that actually owns a captive is the entity entitled to the profits. For example, in the case of a subsidiary captive, the parent company would receive all profits. Alternately, any other party owning a captive would be entitled to profits.

8.    Investment Related Income And Profits To Underwriters

As it relates to businesses with substantial loss experience, insurance type expenses can often be viewed as “sunk” costs. These types of costs are typically non-recoverable. As such, a captive can be used to reduce this type of burden on a business. Investment related income as well as profits that would go to an underwriter can be reclaimed by utilizing a captive.


Businesses, companies and corporations today are seizing the many opportunities made available by captives. In short, a captive enables an entity to maintain increased control over various levels of risk exposure. As such, utilizing captives in this way results in far greater control for business owners when it comes to estate plan risk management.

Send comments or amplifications regarding this blog article to Seamus O’Brien via the main contact form found here. Seamus is an expert advisor with Team Silver Rock and has nearly two decades of experience in working with ultra-high net worth clients and business owners. Seamus specializes in captives or closely held insurance companies for the affluent. Especially those who are wishing to achieve higher levels of tax efficiency.