In business, incurring losses almost always means losing money. Insurance allows entities to divert the burden of loss, which makes it extremely important even for companies that are not engaged in high-risk endeavors. The main problem is that insurance itself rarely comes cheap. Some businesses deal with this issue using captive insurance.
A “captive” is an insurance company created to insure its creators. It is an entirely separate company and functions as a true insurance provider. The full details are a lot more complicated than this. Should you decide to look into the matter further, consulting with a captive insurance attorney or other experts is an excellent start and will give you a good idea if the concept will work for your business.
That said, insurance is meant to shoulder any expense that results from your business’ losses. Using a captive means shouldering your loss and paying for it. It’s high-risk, yes, and could be counterproductive when mismanaged, but it does offer several important and handy benefits:
It is transparent
Owning your insurance provider means you are fully aware of the components of your premium. You also have a large degree of control over how the premium is priced and delivered.
It can help you protect your assets
What if you find yourself unable to pay off your business’ debts? A captive can help shelter your assets from your creditors. When you pay your captive for the premium you took out for your business, the money goes back to you. This money, however, is an asset that no longer belongs to your operating business, so it is no longer available to your creditors.
Because your captive is a regulated legal entity and offers real economic benefits in exchange for your payment, this strategy is legal. It is used not just in business, but also in long-term estate planning.
It lets you create a “war chest” for future use
Captives tend to accumulate assets over time, some of which may be available to you, the owner. In times of great need, it is possible to “cash out” the captive and get the money needed to save your business. Although the ramifications of such a strategy are anything but few and simple, it is much faster than getting a loan from a bank.
It is a new business
Initially, a captive serves no other client but your business. You can, however, treat it as a new business venture. But once it gathers enough capital, you can easily convert it into a full-fledged insurance company that serves a broad clientele. Some companies branch into the risk management sector and earn more profit by following this path.
Risk management is vital in business, but it can be too costly. Creating a captive allows a business to cut costs, secure their assets, and even increase their profits in the long run. Just a caveat: It may not work for everyone, so it would be a great idea to consult with experts before you get started.