If you operate a small business with 50 or more employees, a healthcare captive can provide the benefits of being self-insured without all of the risks involved. With captive insurance, companies can enjoy reduced costs, returns on underwriting profits, and other key benefits. As a form of self-insurance, captive health insurance involves a business owner forming his or her own insurance company to fund losses. As rates are based on your own loss experience, premiums are low compared to conventional health insurance policies.
What Is Captive Insurance?
Captive insurance has become a popular alternative to self-insurance. Under this insurance, a parent group or groups create a licensed insurance company with the intent of providing coverage for itself. It is used by businesses that choose to work outside of a commercial insurance marketplace, and who put their own capital at risk by establishing their own insurance company. They want to achieve their unique risk financing objectives.
Captive insurance companies are not typically formed to provide standalone policies but rather to supplement commercial insurance. Doing this allows businesses to retain the funds that they would otherwise spend on insurance premiums. Captive health insurance can also provide companies with other key advantages.
Complement for Other Insurance Policies
Captive health insurance is typically set up by a parent company to help supplement some of its other existing insurances. While it is not typically intended to replace other insurance policies, it can be used to better manage any deductibles or exclusions that may fall under these policies. A key element of a captive plan is that the parent company is the only entity that is able to make claims on the captive. Any business that is profitable and wants to better control its risks can benefit from a captive.
Most employers want the ability to budget their medical spending in a similar way as their other expenses. However, this is not always possible with conventional health insurance policies due to constant changes in the healthcare industry. With captives, employers can maintain better control over healthcare costs, which means the possibility of lowered costs.
Captive programs allow business owners the chance to select the risks that they wish to retain and which they would like to transfer to an insurance company. This in itself can greatly decrease insurance expenses. When payments to insurance companies are reduced, the money can accrue, which then creates the potential for investment income.
Customizing the Coverage Structure
What makes captive health insurance such a popular option among many small- and mid-sized businesses is its flexibility. It offers coverage that can be tailored to meet the unique needs of the parent group. This can be highly advantageous when coverage is not obtainable due to price or availability.
With captive health insurance, businesses have the freedom to insure any risk that they would like. They can also customize the terms and conditions of each policy. This can result in improved loss control efficiency and promote increased awareness of the various factors that can contribute to losses. The ability to completely customize the health insurance coverage structure is missing from conventional insurance policies.
Advantages for Small Businesses
Captive health insurance can be especially attractive for small- and mid-sized businesses. This is because Congress allows insurance premiums that are paid by a business to be 100% deductible to the sponsoring business. Captives of $1.2 million or less in annual premiums are able to exempt the premium that is received from underwriting income when income for taxation is calculated.
A captive can also provide countless other benefits. For example, it can be used to provide coverage and limits that are not available in the market, such as terrorism and credit risk. A captive can also provide a tax-sheltered approach to larger retentions. When properly designed and implemented, a captive has the potential to become an ongoing source of profit for many years.
Get Expert Opinions on Captive Insurance
While captive health insurance is not right for everyone, this self-insurance strategy can be highly beneficial in certain situations. A captive delivers many key benefits to businesses, such as enhanced risk control, improved cash flow, reduced insurance costs, smooth underwriting cycle, improved tax strategy and access to the reinsurance market. However, captive health insurance can be a complex topic to navigate on your own. To ensure that you create and establish a captive for your business the right way, seek the assistance of an experienced insurance consultant. The insurance consultants at BenefitCorp work with companies of all sizes and in all industries. Reach out today to speak to a consultant.