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Each and every day of our lives, we as business owners are faced with risks. Some risks are calculated; others may not be well known. While you may carry insurance on the truck used to make deliveries in your business, you may not carry insurance on the computer used to track those deliveries.
Unfortunately, unless you pay an insurance company a premium to provide insurance for your business against all of your insurable risks, you may not only be underinsured, you may actually be uninsured.
In this case, the cost of a single claim could be catastrophic to your business. Most businesses—whether it be a manufacturer, construction company, advertising firm, or any number of others—unknowingly self-insure a great portion of their risks from daily business activities. Cash flow constraints can compound matters, budgets can be destroyed, and operating accounts depleted.
How can you sleep well at night knowing such uncertainty exists as it pertains to your company’s vulnerability to future unforeseen occurrences out of your control?
What’s the solution?
The solution for many is a captive insurance company. Properly structured, a captive insurance company can combat inadequate insurance and excessively high premiums, smooth out cash flow constraints, build leverage when dealing with traditional commercial insurance companies, and provide an opportunity to create substantial tax savings.
In simplest terms, captive insurance is a strategy whereby your business purchases insurance coverage from an insurance company that you own and control, i.e., a “captive” insurance company. The premiums paid by your business are tax deductible. Meanwhile, the premiums that your captive collects are tax-exempt up to $2.2 million per year.
Surprisingly, many businesses that are unaware of captive insurance companies simply choose not to insure themselves. As absurd as that may seem to some of us, there is some method to this madness. Insurance statistics bear it out: approximately 80 percent of all insurance claims are made by fewer than 20 percent of all insureds. In other words, most business owners never have a claim, but they pay for the claims of others by purchasing insurance.
Business owners who are not buying insurance have, in many cases, figured out the dirty little secret of insurance. When you buy coverage from an insurance company, the insurance company is making an investment in you. The insurance company is betting its own money that you will not have a claim, and that those valuable premium dollars you paid to buy the policy will become pure profit for the insurance company.
So what can you do about this? Better yet, how do you turn lemons into lemonade? Are you the type of business owner who carefully manages your risk exposure and liabilities? If your answer is yes, then captive insurance may allow you to capture those insurance company profits for yourself.
Captive insurance truly is a simple concept: Properly structured, organized and implemented, combined with an appropriate management services provider, you incorporate your very own insurance company that sells insurance exclusively to you and the businesses that are affiliated with you. Your business pays premiums to your captive in return for insurance covering the potential liabilities and risks of your business. Provided you manage your risk well, any premiums not paid out for losses are recognized as pure profit and kept by your captive.
Just imagine how much lemonade you could purchase with that!