There are so many creative uses for captive insurance initiatives that sometimes its hard to tell whether Mad Science is at work. In fact, just the use of the word “creative” can give your tax advisers the heeby jeeby’s.
Mad Scientist at Work
(Public Domain Image from Dr. Cyclops (1940))
Captive Insurance programs can help to solve many risk financing problems for an organization. In fact, one of the primary reasons to utilize a captive is to provide financing for risk that the traditional insurance marketplace is either unable to provide at a reasonable cost or unwilling to provide at all. Depending on the circumstances many otherwise traditional risk portfolios have found themselves in this position. Among them medical malpractice, trucker’s auto liability, aviation risk and products liability. In each situation these risk portfolios have been able to turn to an alternative risk financing mechanism in order to find coverage.
Another area of risk that can find a refuge in a captive insurance initiative is risk that is specific to a company’s operational characteristics. Known as Enterprise Risk Management (ERM) this school of thought identifies the risks associated with accomplishing the strategic goals of a business, assigns a cost to that risk and then identifies how best to mitigate the risk. Part of the risk mitigation plan may include transferring a part of that risk to a captive insurance company owned by the parent company. An example of ERM for a global manufacturing and sales company might be currency fluctuations. A captive may be able to mitigate that risk for the company and help to smooth out the earnings stream, benefiting the investment stability of the company as well as aiding in planning purposes.
As a final thought, a captive that is successful in helping its parent accomplish its own risk financing goals may be beneficial to that companies upstream and downstream stakeholders. By that I mean a captive may be able to help its parent company’s vendors and clients by applying the same risk solutions to them as it does for its parent. By helping to solve their common risk problems the parent gets the benefit of “third party” risk that helps to achieve tax efficiency for the captive as well as benefiting its partners in the distribution chain.
Bermuda has long been know as the “World’s Insurance Laboratory” and for good cause. It has served as the innovation incubator for many insurance practices that are now common place in the industry. Fortunately, innovation in the captive insurance market is never ending and will continue to move the entire market forward through the innovation of its “mad scientists”.
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