Being an expert in investment banking, Charles Spinelli the President of E3 HR, Inc., for over two decades, takes it upon himself to educate the masses on the reason for the existence of captive insurance companies. He is also famed for extensive knowledge of executive management and security and corporate laws.
A captive insurance company, informs Spinelli, is an insurance company constructed to protect the parent company and its affiliates from any potential risk that is not covered by traditional insurance companies. The policyholders are both the owners and the controllers of such insurance companies.
Reasons For The Formation Of Captive Insurance Companies
There are a few grounds that lead to the necessity of such subsidiary insurance companies.
- When the parent company finds that they are not able to protect itself from being susceptible to risks.
- Because such insurance companies help in tax savings owing to the premium paid to them
- When the insurance provided by such companies is more lucrative
- Because these companies give better risk coverage unlike traditional companies
Benefits Of Captive Insurance Companies
A captive insurance company could be said to be a corporate self-insurance. They allow a parent company to save money by not paying unnecessary premiums to several other companies. Some of the other major advantages of such insurance companies can be as follows:
- Provides personalized coverage: Understanding the fact that every company has specific requirements, these captive insurance companies provide customized coverage. These are specifically suited for those companies that have unique risks and therefore cannot rely on traditional insurance companies. With a captive, they are able to be more flexible and formulate their over-coverage limits and policies.
- Initiates cost savings: The overhead costs of traditional insurance, as Charles Spinelli rightly points out, are way too much. The lower costs of captive insurance, on the other hand, make them a preferred option by many.
Drawback Of Captive Insurance Companies
However, there are some drawbacks of captive insurance also that one should know before making an investment. The setting up and ongoing costs of such companies are rather steep, which may not be lucrative for many investors. Added to this, these insurance companies may be required to abide by certain dissolution and capitalization policies.
Types Of Captive Insurance Companies
There are a plethora of different types of captive insurance companies that one can select from, namely,
- Pure Captive
- Group captive
- Association captive
- Rent-A-Captive
- Protective Cell Captive
- Risk Retention Group
Irrespective of the kind of captive insurance company you select to invest in, Charles Spinelli informs that they all come with their share of advantages and disadvantages. As an investor, it is important that you completely understand the type of insurance you are looking at and verify whether it is in sync with your requirements. It is only when you are absolutely sure about it that you should consider signing up with any captive insurance company instead of a traditional one. Hence to understand the pros and cons of working with a captive insurance company, seeking professional guidance in the matter is a mandate.
