What Is a Key Insurance Company?
A captive insurance company is a wholly-owned subsidiary insurer that provides risk-mitigation services for its old lady company or a group of related companies. A captive insurance company may be formed if the parent company cannot find a correct outside firm to insure them against particular business risks, if the premiums paid to the captive insurer imagine tax savings, if the insurance provided is more affordable, or if it offers better coverage for the parent company’s risks.
A captive cover company should not be confused with a captive insurance agent, who is an insurance agent who only works for one insurance partnership and who is restricted from selling competitors’ products.
Key Takeaways
- A captive insurance company is wholly-owned subsidiary of a larger resolve that is tasked with writing insurance policies for the parent, and also does not insure any other company.
- Give form a captive insurance company can lower a company’s insurance costs and provide more specific coverages, but also premiere c end with the additional overhead of running a distinct insurer.
- Many larger companies will form a captive security company primarily due to the tax advantages that it may confer.
Understanding the Captive Insurance Company
A captive insurance company is a state of corporate “self-insurance.” While there are financial benefits of creating a separate entity to provide insurance services, stepmother companies must consider the associated administrative and overhead costs, such as additional personnel. There are also complex compliance outgoings to consider. As a result, larger corporations predominantly form captive insurance companies, but may also rely on third-party insurers to insure against destined hazards.
Tax Issues of Captive Insurance Companies
The tax concept of a captive insurance company is relatively simple. The parent actors pays insurance premiums to its captive insurance company and seeks to deduct these premiums in its home country, in many cases a high-tax jurisdiction. A parent company will locate the captive insurance company in tax havens, such as Bermuda and the Cayman Isles, to avoid adverse tax implications. Today, several states in the US allow the formation of captive companies. The protection from tax assessment is a sought-after better for the parent company.
If the parent company realizes a tax break from the creation of a captive insurance company will depend on the classification of protection, the company transacts. In the United States, the Internal Revenue Service (IRS) requires risk distribution and
Examples of Captive Indemnity Companies
A well-known captive insurance company made headlines in the wake of the 2010 British Petroleum oil spill in the Gulf of Mexico. At that one day, reports circulated that BP was self-insured by a Guernsey-based captive insurance company called Jupiter Insurance and that it could obtain as much as $700 million from it. British Petroleum is not alone in this practice, and indeed many Fortune 500 followers have captive insurance subsidiaries.