There are start-up costs for forming any captive, but the advantages of financing risk through a captive vehicle are many:
- Better Experience Equals Profit – When a company buys traditional insurance, fewer or less costly claims than expected result in a profit for the insurance company, not the insurance buyer. With a captive, companies can benefit financially from good claims experience.
- Added Risk Controls – Because high claims can cost a captive insurer, most companies put in place added risk controls, which typically reduce the frequency and severity of claims.
- Cost Efficiencies – Buying insurance through traditional markets can be a hit-or-miss proposition when pricing is concerned, especially during a hard market. With a captive, organizations are in a better position to control and even reduce premium costs.
- Increased Availability – When a line of insurance experiences greater-than-expected losses, the availability of such insurance – called capacity – can become limited through traditional insurance outlets. Captive insurance reduces the effect of limited capacity on an organization.
- Access to Reinsurance – Even captive insurance companies may not have the capacity they desire, but they have direct access to reinsurance companies to gain that capacity.
- Tax Benefits – A captive insurance company in most domiciles can create tax savings for policy owners.