What is an Insurance Captive? The Best Option for Small Businesses

If you’re unaware of what is an insurance captive, no worries. You’re not alone.

Even for those with experience in the field of insurance, understanding new models like captive insurance can be a bit too much to handle, at first. However, for small business owners, captive insurance can be a great option to minimize their risk and overarching insurance costs.

If you’re on the market for a new (and improved) form of insurance for your small business, you’ve come to the right place. Keep on reading for our little guide on what captive insurance entails, the main differences between one and traditional insurance plans, and a quick look at the two basic categories of captive insurance.

What Is an Insurance Captive?

Let’s start with the basics.

Captive insurance is a term used to designate an insurance company that’s owned by the insured themselves. In the simplest of terms, it’s a method where your company’s risk to loss is financed. Of course, once you’ve linked the owning entity of the insurance to the insured party, the captive transaction will be affected in one way or another.

Moreover, captive insurance companies were originally formed when a parent company couldn’t find an appropriate insurance firm for risk-mitigation against specific business risks. Also, the company might form captive insurance if the premiums paid can be used to create tax savings, or the premiums themselves are cheaper, or the coverage plan is better tailored for the original business.

The Difference Between Captives and Traditional Insurance

A regular insurance company will require an application from your business. If accepted, you’ll be underwriting information to the insurance company in the form of a contract, entailing the processes of providing payment to replace losses under specific circumstances.

This whole process is known as traditional insurance.

Once you step out of that model, you’ve automatically entered the realm of alternative risk finance. Captive insurance is a type of alternative risk finance.

Main Types of Captive Insurance

Generally speaking, there will be two main types of captives.

There are the pure captives, which are insurance companies that only insure the risks of their owner (or owners). A subcategory of pure captives would the single-parent captives, and those will only have one owner, unlike the group captives, which can have multiple owners.

On the other side of the spectrum, you’ll find sponsored captive insurers, like this captive insurance company. They are also known as non-affiliated or non-owned captives. The basic business model of these insurers would be putting their own capital at risk and the risks will be financed outside your regular commercial regulatory environment.

Ready to Get a Tailor-Made Insurance Plan?

If you’re a small business owner, you already know that there will be no escaping getting a form of insurance to operate. Thankfully, after reading our small breakdown, you’re now familiar with a different type of insurance.

We hope that you thoroughly understand what is an insurance captive, and you’re ready to start your research with a solid foundation of insurance knowledge.