Captive insurance is when a company sets up its insurance subsidiary to cover some or all of its risks instead of buying insurance from regular insurers. This allows the company to essentially act as its insurer. Captive insurance companies can cover risks like property damage, liability, employee benefits, and more.
Companies may choose to create an insurance company for several reasons;
1. Cost Savings: Captive insurance can be more cost-effective than insurance, especially for companies with significant risks or specific needs.
2. Customized Coverage; By having a captive, a company can customize insurance coverage to suit its risks and requirements rather than relying on standard policies from commercial insurers.
3. Risk Management: Captive insurance is useful for managing and reducing risks, giving companies control over their insurance programs and claims processes.
4. Tax Benefits: In some cases, captive insurers may provide tax benefits, such as favorable tax treatment on premiums and investment income.
However setting up and running an insurance company involves challenges, like meeting regulatory requirements capital demands and ongoing administrative expenses. Many big companies often opt for insurance as they have the financial capacity and expertise in risk management to handle their insurance needs independently.