There are various types of risks you can face while running a business organization. You can manage the risk in two ways. You can either retain risk or you can share it. If the risks are small you can manage it on your own. But for bigger risks there in insurance. People usually do insurance policies that can help them if they are in some sort of problem. But in some cases, the insurance companies deny providing cover. To get out of the situation the financial market has created captive insurance. In this article, we are going to discuss its definition, types, and the benefits that it has.
Definition:
It is a type of insurance company that the parent company creates to help itself at the time of risk. The design of the company is to underwrite the risk of its parent company. The parent company is the owner of the captive insurance company. The sole purpose of this company is to ensure the risks of the parent company and its affiliates.
Read Also: What is Reinsurance? Its Definition, Types, and Examples!
In simple words, it is a type of self-insurance. The parent company which owns the captive insurance company is insured by the captive insurance company itself at the time of risk. It is a subsidiary company of the parent company. The reason for creation is to write about the risks of itself and its affiliates. These types of companies operate in very few countries. But the need is increasing with time.
Types of Captive Insurance:
Most of the captive insurance companies cover only their parent companies. But there are different types of companies present in the market. They are:
#1. Single Parent Captive Insurance
This is an insurance company which insures the parent company and its affiliates. This type of captive insurance company writes about the risks of the parent company. The owner of the insurance company is the parent company itself. As the owner of the captive insurance company, the parent company can use it in any kind of risk management without taking permission from anyone.
#2. Association Captive Insurance
An association captive insurance company’s owner is a trade or industry or a service group. They create this type of association captive insurance companies to give benefits to its members. There can be different companies that can do the same type of trading. They often create these types of companies to ensure the non-insurable risks. The association is the main authority of captive insurance. So for channelizing the money to manage risk you first need confirmation from the Association.
#3. Group Captive Insurance
In a group captive insurance company there is more than one company working as a parent company. This type of company has multiple owners. A lot of companies joins hand to create a company which helps them to write off their risks.
#4. Agency Captive Insurance
In this type, the owner is an insurance company or a brokerage firm. They create this type of subsidiary to reinsure a part of the risk of the customers.
#5. Rent-a-Captive
Sometimes a captive insurance company provides captive insurance facility to other organizations in exchange for a fee. If the parent company has a minimal risk to manage then it can rent their facilities to the other similar companies with similar types of risk. Companies like AIG help you form a functional captive insurance company of your own.
Working process and benefits:
- By doing it the organization reduces its dependence on the commercial insurance companies. As the captive insurance company grows, its capacity for risk management increases. Thus the dependence on other commercial insurance organizations decreases.
- With the growth of the company, the parent company reduces commercial insurance purchases. So the company pays less amount of money in brokerage.
- Captive Insurance helps the parent company to cover such risks that the insurance companies reject to cover. They are like product liability, professional liability insurance.
- It gives access to the re-insurance market bypassing the conventional method.
- As the premiums, the parent company usually paid to the commercial insurance company before, now is paid to the captive insurance. Thus the company is now able to access the premiums. It helps in the cash flow of the parent company
- As it is a subsidiary company of the parent company there is a reduction of regulation by the government.
- The parent company can choose any type of risk that it needs to cover.
- As the company is a subsidiary of the parent company, the parent company has full control over it. It helps the parent company to handle the claims and channel it into any risk coverage
- With the growth of the company, the parent company can make a profit from it. It can rent a captive to the other companies who need similar risk coverage, in exchange for a fee. Thus it can earn profit for the parent company.
- The money that the parent company pays as a premium to the company is tax-deductible. So it helps to save some tax and has many benefits for the parent company.
Conclusion:
All the captive insurance company’s main objective is to write about the risks of its parent companies. With the growth of the company, it helps the parent company by reducing its dependence on the other commercial insurances. Thus it increases the cash flow. The parent company has full control over it. So the parent company can use it in any kind of risk. With the growth of the company it also helps to generate profit for the parent company. So if you own an organization then you must think of forming a Captive Insurance Company as a subsidiary. If you like this article share it. For further information comment in our comment box below.
