It can be hard to decipher the differences between captive insurance and traditional insurance. That’s why CIC Services have simplified it for you with the essentials. We have compiled the explanations of each along with some pros and cons to help you decide if captive insurance is right for you and your business.

Captive Insurance vs. Traditional Insurance

What is captive insurance?

Captive insurance is a type of self-insurance for businesses looking for more control over their insurance premiums. A captive insurance company is a subsidiary of a business owner(s) company that writes the insurance policies for the business owner’s company. This can lower costs of monthly premiums for a company but, initially, may require more overhead costs. Additionally, this method of insurance can have tax advantages for a company by being able to write off premiums paid to the captive insurance company.

Pros of a captive insurance program

• Potential to save money on premiums and taxes
• Long term investment
• Great for big, medium, and small market companies
• Provides risk distribution

What is traditional insurance? 

Traditional insurance is when a company transfers risk to a third-party company that charges a premium and requires a deductible. That premium is pooled with other premiums received from other insured risks. The traditional insurance companies calculate the probability of risk based on the large pool of risks they insure, which then determines your company’s premium costs. The premiums paid to the traditional insurer are not returned to those being insured unless they file a claim. Additionally, the traditional insurer will require the insured to pay their deductible out of their pocket and your successive years’ premium will increase due to the loss and perceived risk increase. One benefit to traditional insurance is the simplicity of purchasing insurance by contacting an insurance agency.

Pros of Traditional 

• Low start-up costs
• Tax deductions for premiums
• Risk Distribution
• Simple to setup

The cons of a captive insurance program

To start a captive insurance company requires initial start-up costs associated with capitalization requirements and proper formation fees, which include legal fees. This is due to the captive insurance company being a legally formed corporation. With captive insurance, you are betting on your risk mitigation strategies and controls to fund your potential losses and to keep such profitability that usually ends up in the traditional insurance company. This requires sufficient funding to ensure potential losses can be paid.  To further distribute risk, your captive company does have the option to work with a reinsurer to pool your premiums with other captive insurers which may mitigate some of these risks.

Fortunately, CIC Services handles all of the complexities of captive formation and makes starting and running a captive a seamless transaction. Find out more about our expert team here.

The cons of traditional insurance

With traditional insurance, your risk is taken on by a third-party insurance provider. They are betting on not having to pay out a claim based on the risk factors of your business. Every year your company pays a premium and goes without a claim, the traditional insurance company profits. Additionally, the business owner faces the annual risks of claim denial (due to restrictive policy language), exorbitant rate hikes, and/or capacity problems.  This means that premiums will be more expensive, and all premiums and deductibles are sunk costs.

In the end, the decision of captive insurance vs traditional insurance is dependent on your company’s size, goals, and risk factors. Determine if captive insurance right for your company by discussing it with a captive insurance management company. Contact CIC Services today to learn more and get started on your captive.