Understanding Property & Casualty Captives: The Basics

Traditional commercial insurance policies meet the risk mitigation needs of many smaller businesses. Large businesses and those with high-risk profiles may find traditional insurance options lacking, however. When property and casualty insurance is too expensive or unavailable, property insurance captives may be a good alternative solution.

What is a Property & Casualty Captive?

Property and casualty captive is a business structure, in which one business is insured by its wholly owned subsidiary. The insured business doesn’t operate within the insurance industry, and its subsidiary is created solely to insure the business (or a group of businesses).

For example, assume a national amusement park chain has high insurance premiums due to its significant risk profile. The amusement park may create its own subsidiary business, which is a separate business entity that’s owned by the park and insures the park.

The P&C captive insurance structure is a form of self-insurance, where risk is transferred from a traditional insurance company to the business that’s being insured. The business (e.g. the amusement park) is assuming risk because it owns the subsidiary that provides insurance.

Why Use Property & Casualty Captive Insurance?

Property and casualty insurance captives offer several benefits, including both major and minor ones. Businesses generally use the P&C captive structure for one (or several) of the following reasons:

• Customized Unique Coverage: Some businesses in high-risk industries may simply be unable to procure coverage through traditional insurance policies. In these cases, the captive structure allows businesses to set up P&C insurance that’s tailored to their particular and unique needs. When a business owns the insuring subsidiary, the business can largely decide the terms of coverage.
  
  
• Premium Savings: Many large businesses and businesses in high-risk industries have substantial -- if not downright expensive -- insurance premiums. Setting up P&C captive insurance allows a business to reduce premiums in two ways. First, they can structure a customized policy so that it has lower premiums. Second, any revenues retained by the subsidiary might be used to offset future premium costs. In other words, a business’s subsidiary retains any extra revenue if claims are lower than expected.
  
  
• Tax Mitigation: Even though P&C captives are similar to straight self-insuring in some ways, the two strategies have different tax implications. Merely saving up to self-insure normally doesn’t allow for any tax savings, as there’s no associated business expense until something happens. When a subsidiary holds the premiums against claims, the amount reserved might be written off as a tax deduction. Thus, the subsidiary can claim tax benefits sooner and even if nothing ever happens.

Both structuring policies and realizing any tax advantages require P&C captives to be properly set up. When setting up captive insurance, businesses should work with a knowledgeable insurance professional who specializes in this type of less common insurance.

What Businesses Should Use Property Insurance Captives?

Businesses generally may want to consider a property insurance captive if their premiums are approximately $1 million or more. Businesses with lower premiums, possibly as low as around $250,000, might benefit from a group captive (see below).

These amounts aren’t strict requirements, and any business technically can explore captive structuring. Only businesses with a certain amount of premiums are likely to save with this strategy.

A knowledgeable insurance professional can help businesses evaluate whether this strategy is right for them. If it’s not, an insurance agent can alternatively help businesses explore other premium reduction options.

What Types of Property and Casualty Insurance Captives Are There?

Property and casualty insurance captives can be either a single parent captive or a group captive. The two categories refer to how many businesses the subsidiary insures:

• Single parent captives have one parent organization or one business that’s insured and owned by the captive. The subsidiary may insure all or parts of the parent business.
  
  
• Group captives have multiple organizations that own and are insured by the captive, and the parent organizations aren’t related.

The parent organizations can all be from the same industry, in which case the subsidiary might provide specific coverages that are unique to the industry. The parent organizations alternatively can be from different industries, in which case risk may be more spread out across the various industries. Again, the subsidiary can insure all or part of its parent businesses.

What Domicile Should Businesses Select for Their Captive Subsidiary?

The domicile of a captive subsidiary can be the same country as where the parent business is located, but it doesn’t have to be. Businesses regularly have subsidiary entities located in other countries, and a subsidiary P&C insurance captive is no different in this regard.

Whether a P&C captive subsidiary should have a domestic or foreign domicile is a complex matter that involves regulatory, tax, and other considerations. It must be evaluated on a case-by-case basis, and often extensive research is required. Businesses commonly talk to regulators, or meet them in person, to discuss business coverage needs, subsidiary structure and operations, and government concerns.

Although the process of evaluating domiciles can be complex, a specialized insurance professional can guide businesses through the entire process.

What Benefits Do P&C Property Insurance Captives Offer?

Establishing a P&C property insurance captive can result in multiple benefits:

• Tailored coverage for hard-to-insure risks
  
  
• Flexible risk-mitigation options
  
  
• Creative insurance solutions for unique situations
  
  
• Manage insurance market cycles
  
  
• Possible premium savings
  
  
• Possible tax advantages

Get Help With Joining a Captive

Joining a property and casualty insurance captive can seem like a daunting process, especially since the businesses that use these normally aren’t in the insurance industry. Evaluating what captive to partner with, the risks versus the rewards, and the financial structure is nigh impossible without experience and expertise.

We at Winter-Dent & Company have the experience and expertise necessary to help you evaluate P&C captive options. Our knowledgeable team will work closely with you to determine whether a captive indeed does make sense for your business. If one does, our dedicated team will guide you through the entire process comparing options and ultimately selecting a captive.

For more information about insurance captive options and what one could do for your business, contact us.