3 Interesting Benefits of Captives in The Technology Era
Captives are insurance companies that are started and completely owned by the company that they insure. However, group captives are the result of several companies, typically in the same or a similar industry, working together to start a business insurance company to mitigate risks specific to the industry and businesses.
Asset Growth
Companies with captives pay their premiums to their captives, so the money stays inside the company. Because these companies are essentially paying themselves when they pay their premiums, the company accumulates assets that would otherwise go to outside companies.
However, this money cannot just be used by the company. The IRS requires that a specific percentage of these assets be retained by the insurance company in case of an emergency. Although the company could withdraw some of the assets, a significant tax penalty may be charged for such a withdrawal.
Policy Drafting
Because the company owns its own insurance company, it can tailor its coverage. This focus allows companies to only pay for what they need, eliminating some of the extras that many traditional insurance policies may add in or require. In addition, captive policies can be written in such a way that the policy can never be touched by a third party. Writing their own policies can save significantly and prevent payouts to anyone but the company itself.
Captive Stock
Instead of giving or selling ownership in the company itself, some companies may choose to sell or give away ownership in its subsidiary captive. For example, key employees may receive ownership in their employers’ captives through stock distribution. Although this is uncommon, it may be an interesting way to reward employees.
Captives have significant benefits, including increased cash flow, tailor-made policies and possible stock distribution to valued employees. In addition, because these policies provide insurance against otherwise uninsurable accidents, their parent companies do not have to worry about losing everything in a major accident or incident.
