3 Types of Captives for Small Businesses

Captives are created by companies to pay for uninsured risk, including inventory challenges, punitive damages, product recall and loss of suppliers or customers. However, companies can invest in several types of captive insurance companies.

Association or Group

Association or group captive insurance companies are started by several companies in the same or similar industries and business risks. Companies or individuals in trade or professional associations, such as electricians or physicians, may also be exposed to similar risks, so they may also form group captives. These captives are great for individuals or companies who do not have the assets or capital to fund an insurance company themselves. Group captives allow several or many individuals or companies to spread the risk, share their claims experience and save money.

Rent-a-Captive

When third-party companies gain insurance from captives they do not own, they are participating in a rent-a-captive. These companies may not have the time or assets to create their own captives, but they want to take advantage of the lower, more stable premiums and enhanced insurance control, so they purchase insurance from an already established captive. Many of these insured companies later join a group captive or start their own.

Micro-Captives

Although most captives are owned by large corporations, some smaller companies also have uninsurable risks. Smaller companies may start micro-captives that have fewer assets and premium incomes (less than $2.35 million per year). The IRS determines the income caps and the parent companies are responsible for investment income taxes. Underwriting profits, premium income and expenses, including paid claims, are not taxable.

These captives must have risk that is shifted to the insurer and distributed among all those who hold policies. The risks may include general liability, property loss and workers’ compensation.

If you have a small company and do not have the capital or time to devote to creating your own captive, any of these captives may be an option.