A comprehensive risk management plan encompasses many strategies, including forming a captive insurance company to protect against losses and bridge gaps in coverage. When companies opt to add captive risk management solutions, they also financially benefit in three key ways.
Businesses that utilize captive insurance are able to deduct premiums paid to it if they meet certain IRS criteria. Captives also can be domiciled in countries that have favorable tax laws even if the company forming the captive cannot for its own operations. Effectively reducing the overall tax burden for the company leads to increased profitability and a healthier balance sheet.
Unlike traditional insurance premiums, captive insurance payments don’t include additional funds required to turn a profit for the policy issuer. In addition, captives have lower operating expenses and administrative costs, which means premium dollars are largely based on the potential loss itself rather than the company’s overhead expenses.
Cash Flow Improvement
The premium paid into captives generates tax-free interest that can be paid back to the company forming the captive. Also, when premiums are paid but losses don’t occur, the company can utilize the cash surplus pay in dividends.
Captive risk management solutions are a valuable part of a comprehensive risk management strategy. Besides the many other advantages, the financial benefits of forming captives make it an attractive alternative or addition to traditional insurance.