Captive insurance [4] owners have a direct and unique relationship with the underwriter. They interact directly with the underwriter internally and not as an external capacity provider.
The nature of this business model therefore introduces certain advantages that do not exist in a traditional insurance company.
Captive insurance companies: operational and strategic advantages
Captive structures [5] offer companies, often multinationals, operational and strategic edge: elimination of insurer risk-related expenses, underwriting benefits, better control of cash flow, better claims control and management, better control of pricing and rate setting.
- Reduced insurance costs
The use of this type of structures reduces the commercial insurance premium in its acquisition cost, overhead and profit portions. Owners do not incur premium distribution costs and retain underwriting profits.
- Subcontracting the operation
Owners retain the financial benefits of the insurance portfolio while outsourcing the management of the operation.
- Underwriting's operational control
Risk underwriting is performed solely on the basis of the company's needs. It is a "tailored" underwriting with appropriate pricing.
In addition, the claims process is very efficient with better managed insurance pricing cycles.
Finally, the parent companies have an automatic capacity dedicated solely to their risks.
- Cash flow
Establishing a captive insurance company allows greater flexibility in scheduling premium payments, with shareholders retaining premiums and investment income, which significantly improves cash flow.
- Risk management
Owners have broader options for selecting the type and portion of risk to insure and reinsure in addition to benefiting from better risk control.
The company can offer faster solutions for covering complicated or uneconomic risks. In the traditional market, insurance for such risks would be much more difficult to obtain.
- Claims payment
With a single owner and a single client, claims service is made easy as it remains focused on the owner's risks.
A company also provides direct access to the reinsurance market.
- Tax benefits
Owners enjoy tax benefits related to premiums paid within the group. It is because they report their profits differently than other companies, that captives enjoy such benefits. In addition, each jurisdiction offers specific tax benefits.
Read also | The captive, an alternative solution to traditional insurance [6]
Evaluating captive insurance performance
Before considering broader coverage offerings, it makes perfect sense to periodically evaluate the functionality and results of a mature captive's existing program. This review takes into account:
- the rate of achievement of the goals set by the original business plan,
- the actual experience in terms of underwriting, premiums, claims, etc.,
- the operating results including data flows and internal controls,
- the role and performance of service providers,
- opportunities for underwriting new risks,
- the level of capital required for any potential expansion.