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Captive Insurance Lets Companies Spend Less Money And Manage Their Own Insurance
Companies are able to establish sister or subsidiary companies that handle their insurance policies; this system is referred to as captive insurance. This sort of insurance is not given to the public, but instead serves as an alternative risk management solution for companies who do not want to use traditional insurance. Since insurance premiums are quite high for most businesses and a corporation can benefit financially by running its own in house captive insurance, it is an attractive option to many businesses of varying sizes.
A few companies have found that the costs of purchasing an insurance policy actually outweigh their potential losses. Such situations have led many companies to consider forming captive insurance companies. Normal insurance companies base their rates on the average risk of many different clients, so a company with a relatively low risk may end up paying high premiums that are not relative to their risk. Additionally, insurance companies have to compensate for profits and overhead. Prices set by captive insurance companies are reduced since they have less overhead and are more efficient. The red tape and endlessly frustrating policies of most insurance companies are also greatly reduced or non-existent in captive insurance agencies.
Captive insurance policies have to coincide with all insurance, contract, and tax laws. For example, if an established business forms a secondary company for use as a captive insurance company, the two must be completely separate in legal and tax terms. To receive tax deductions from insurance premiums, a company must treat its captive insurance provider just like any other insurance agency.
Businesses can create a number of different types of captive insurance companies. The parent company that formed the captive agency is the only company that will be covered by a single parent agency. If a group of companies that work in a common industry decide to create a captive insurance agency for them to use, it is referred to as an association captive. If a traditional insurance agency were to pay out many large compensations all at once, it could destroy the company financially. Agency captive insurance agencies are the standard that most insurance companies use to cover their risk. The smaller captive company will share the financial responsibility in the case of catastrophic losses for the insurance agency.
Companies who want to stop paying too much for a traditional insurance policy but still need to attend to their financial risks are ideal candidates for captive insurance. They are formed by parent companies to provide in house insurance of many types, including physical property damage, employee benefits, product liability, and professional indemnity insurance.
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