The following is Part I of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types of captive insurance, this posting and the five to follow will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your healthcare business.
- Commercial insurance providers often rely on industry loss statistics in setting rates rather than focusing on the loss experience of the individual company whose loss experience may be well below the industry average due to the company’s safety and other loss reduction programs;
- The constraints on a company to work with its insurer to fashion insurance policies and risk coverages with terms and conditions tailored to the company’s particular risk profile; and
- Inefficiencies and issues in processing claims through a third-party insurer.
In view of the above, many companies have considered incorporating or organizing captive insurance subsidiaries as a means to address the legitimate business and economic issues that may arise from reliance on third party commercial insurance or self-insurance. Captive insurance is simply a type of risk management tool that is an alternative to self-insurance and traditional third party insurance. The business and economic aspects of insurance should be the driver in undertaking the analysis of whether the company can benefit from forming a captive in light of the considerable costs of implementing and operating a captive insurance company.
This six-part series of blog postings will address the first form only – the single member or “pure” captive which many companies have formed. This works well with holding companies with a number of subsidiaries. It also works well with a company with many operating divisions that can be incorporated or organized as separate limited liability companies and reorganized into a holding company structure. In the upcoming posts, the subsidiaries will be referred to as “brother-sister affiliates.”
A captive insurance company does not have to be owned by the parent holding company for the brother-sister affiliates to take advantage of the benefits a captive insurance company can provide. Another of the many ownership structures of captive insurance companies is one in which the shareholders or members of the parent organize a corporation or a limited liability company to qualify as a captive insurance company to provide the insurance to the parent and the brother-sister affiliates of the parent. This is often selected for wealth transfer and estate planning reasons and is the subject of Part II of this six-part series of blog postings.
Next Posting: Alternative Structure – Ownership of the Captive by Affiliates of the Holding Company