The following is Part V 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 one to follow will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your food and agribusiness company. Part I, Part II, Part III and Part IV of the blog series are here.
This posting provides an overview of the benefits to a company and its shareholders or members of forming a single parent or pure captive.
PART V – CERTAIN BENEFITS OF FORMING A SINGLE PARENT OR PURE CAPTIVE
After identifying the most salient risks facing a company (which should be a part of any company’s risk management function) management considering captive insurance should evaluate the following:
- whether commercial insurance coverage is available for those risks;
- whether the available commercial coverage for those risks have such a high deductible and so many exclusions that the company is effectively self-insuring the potential losses from those risks;
- whether the premiums charged by the commercial providers are not only affordable but also less than the company could provide itself through forming a captive subsidiary for those risks, given the probability of the occurrence of the risk events actually occurring and the magnitude of the loss if the event were to occur; and
- whether commercial insurance for those risks are likely to remain available at such affordable costs for the foreseeable future.
One of the primary values of the single parent captive is the parent’s ability to customize policies that insure against business and operational risks that are not available from third party insurers or at costs that are unreasonably high given the risk and the potential harm to the company. Captive insurance rarely replaces third party insurance. Rather, it serves as a gap filler to provide coverage that commercial carriers do not provide at a reasonable cost.
Continue Reading Using Captive Insurance to Create Value for Your Company – Part V