Understanding Single-Parent Captive Insurance Structures

The concept of captive insurance companies has been around for a long time, but historically speaking, they have only proliferated in times of hard private insurance markets. Lately, however, more and more companies have opted to pursue this type of insurance strategy for a variety of reasons even when private insurance markets are relatively soft. Of course, speaking of captives generally requires an understanding of the range of captive insurance structures that are possible, and the most common of these is the single-parent captive.

captive insurance structures

What Are Single-Parent Captives?

A single-parent captive is an insurance company that is set up as a subsidiary of a larger company and that is wholly owned by that parent company. About two-thirds of the current captive insurers fall into this category, and they often insure the parent company along with its other subsidiaries or affiliates.

In this version of captive insurance structures, the parent company provides risk capital and pays premiums to the captive. The parent also often hires an outside firm to manage the captive, and this may be a dedicated captive manager or another private insurance company. The types of coverages provided through captives are generally in line with those available on the open market, and the claims management process through a single-parent captive works in much the same way as it would through private insurance.

 

When to Choose Single-Parent Captive Insurance Structures

Because a single-parent captive is a corporation unto itself, the parent company must have the resources to fund and structure it properly. Although there are definite financial and practical benefits to utilizing this type of insurance strategy, those will only fully be realized if the parent is able to take a long-term view.

The types of premiums the parent faces on the open insurance market must also be substantial enough to warrant the establishment of another company and to offset the associated costs that come with its management. This condition may come about for a variety of reasons, including the sheer size of the parent company, the particular risk they are seeking to insure, or the specific niche they operate in. For instance, setting up a captive may be the best way for a company to cover a high-risk aspect of the business that would be prohibitively expensive, or even impossible, to insure though a traditional insurer.

 

Benefits of the Single-Parent Captive Insurance Structures

Acquiring insurance through a captive provides a level of flexibility to adapt to changing market conditions that the parent would not otherwise have, and it allows for a policy that is tailored precisely to the parent’s needs. This is especially true when it comes to parent businesses that operate in a highly-specialized niche, and also in relation to the cyber liability that more and more companies are being forced to deal with.

The tax benefits of utilizing a single-parent captive are not insignificant either, as the parent company can write off the premiums paid to the captive. Since the captive is likely established in a low-tax area, this results in a net tax break for the parent company. The captive can also invest the premium income, and that may become a source of revenue for the parent as long as it’s not needed to pay a claim.

 

To learn more about how we can help you find the best alternative risk funding structures for your business, contact Venture Captive Management today at 770.246.8535.