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Home > Services > Domestic Wealth Planning > Insurance Strategies for Wealth Accumulation > Captive Insurance Companies
A Captive Insurance company is a special type of company used by multinational businesses. Oil and shipping companies are a few of the companies that use "captives." Captives are used to insure and reinsure risk of subsidiaries and affiliates, such as the risk of shipping fuel and commodities. Captives offer solutions to situations such as what happens if the bananas get some fruit rotting bacteria on the way to delivery: or what happens if the tanker pulls into port and the recipient defaults: what happens if the UPS or Fed X shipment is delayed and all of the overnight fees have to be returned for contractual default. We know that Dole, UPS and Fed X can withstand these types of company disasters, but what about the mid sized business person importing and shipping?
These businesses face mainstream daily risk. Captives are used as a management strategy to control this risk. Does your business face daily risk such as this?
A captive insurance company represents an option for many corporations and groups that want to take financial control and manage risks by underwriting their own insurance rather than paying premiums to third-party insurers.
Captives provide tremendous flexibility for managing risk and great incentive for loss control. One great advantage is the investment that a company gains in their own lost income. It is as if a company is their own wholesaler, reducing operating cost, increasing their coverage and increasing their bargaining power with underwriters. Here are some additional advantages and reasons why
Captive Insurance companies are powerful when using them as an insurance stragegy for accumulating wealth.
♦Greater control over claims
♦Smaller deductibles for operating units
♦Alternatives to costly practice of trading dollars with underwriters in the working layers of risk
♦Coverage tailored to meet your needs
♦Improved cash flow
The captive market is most known in the jurisdictions of Bermuda, Cayman Islands, Guernsey, Isle of Man, Gibraltar and Turks and Caicos. You can incorporate a captive domestically in some states, most common in the US is Vermont, due to support laws. Your accountant and planner should be involved in choosing the jurisdiction that suits your coverage, tax planning and coordinates with your Asset Protection Plan.
How Do You Start A Captive?
It's not simple; you cannot do it by yourself. With that said, generally captives involve multiple types of insurance (health insurance included). It is reasonable to assume that you will need $20,000 to start. You prepare documentation similar to incorporation and then you will have to submit them to the Commissions for Banking, Insurance, Securities and Health Care with application fees. There will likely be reviews and meetings. Then there will be a Certificate of Good Standing or something like this depending on the jurisdictional laws and subsequently some type of Certificate of Authority.
Every jurisdiction has their own audit rules and your accountant should be well versed in insurance audits. After this, you will be required to capitalize your specific transaction and negotiate directly with underwriters to get the best coverage and rate. Due to intricacies and complications, captives are not for the inexperienced entrepreneurs.
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