The Captive Insurance Pros and Cons You Need to Know

Captive insurance is a great alternative to traditional insurance policies.

captive insurance

Unlike regular insurance, captive insurance is solely owned by the insured. This means that people can pay for their insurance and choose how the payments will be distributed for claims.

Many businesses use captive insurance because they enjoy having full control over their assets. There are several advantages and disadvantages of self-insurance, so it can be difficult to decide whether it’s right for you.

Read on to learn more about some of the captive insurance pros and cons.

Advantages

Captive insurance provides businesses with a variety of advantages, including reduced costs, improved cash flow, and investment income to fund losses. Here are some of the main pros:

Flexibility

Captive insurance provides the benefits of insurance and flexibility into a single package. Various types of insurance can be used and the rates can be inexpensive. Depending on how many things are covered, investors can change the rates as time passes.

Predictability

Standard insurance policies will define how much they’ll cover for an accident or damages. Captive insurance is completely in the hands of the organizations and individuals that are investing in it, so they can choose how losses are paid.

Disadvantages

While there are many captive insurance company tax benefits, there are also a few disadvantages  

Raising Capital

Because captive insurance is essentially a self-insurance policy, there must be a certain amount of capital available at all times. Raising capital is mandatory because the reserve can’t get low. Otherwise, investors would have to use company assets to cover claims.

Can’t Spread Out the Risk

Insurance relies on risk. To keep costs down, that risk has to be spread throughout a variety of people so that there’s a decent level of protection. However, captive insurance often has a small pool of individuals. This can force individuals to pay more each year, making it difficult to properly budget.

Barriers to Entry and Exit

Captive insurance policies are often difficult to obtain due to a variety of barriers compared to other policies. Most of the positions are left to those that have been in the business for a while, so new entries can be limited if anyone’s currently seeking captive insurance. 

Now You Know the Captive Insurance Pros and Cons

There are numerous captive insurance pros and cons, but these are the main points that you should be aware of. Captive insurance is an alternative to traditional insurance. It allows businesses to have more control over their insurance, and it can sometimes be more affordable.

Keep in mind that it will be difficult for people to get into a captive insurance policy if they don’t hold high positions in the company. Anyone that’s looking to get in from a lower position most likely won’t be able to.

It’s recommended that those with captive insurance also acquire a second insurance policy. This ensures that you’ll be able to cover any damages should something happen to your captive insurance.

Browse our blog to find more articles about captive insurance that will help you decide if your company could benefit from it.

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