USING CAPTIVE INSURANCE TO CREATE VALUE FOR YOUR COMPANY

The following is Part IV of a six-part series of blog postings regarding whether a captive insurance subsidiary or one owned by the owners or affiliates of a company may represent an effective risk management tool that also provides economic benefits. Although there are various types of captive insurance, this posting and the two to follow will focus primarily on single parent/pure captives and how they might provide economic benefits for you or your food and agribusiness company. Part I, Part II and Part III of the blog series are here.

This posting discusses the types of insurance coverage that may be effectively provided by a captive insurance subsidiary.    

PART IV – USE OF SINGLE PARENT OR PURE CAPTIVES TO COVER MANY DIFFERENT TYPES OF RISKS

In addition to having bona fide insurance needs (which is the paramount consideration), the following attributes should be present for any company considering forming a captive insurance company subsidiary:

  • Annual profits of not less than $500,000 with the reasonable expectation of continuing or increasing profits for the foreseeable future;
  • Need for annual tax deductions in an amount at least sufficient to cover the costs and expenses of organizing and operating a captive insurance subsidiary; and
  • Eight or more operating subsidiaries with bona fide insurance needs that can be profitably met by a captive insurance subsidiary.

Companies operating in different industries nevertheless face many of the same type of insurable risks – risks that can be covered by their respective single parent captive insurance companies as well as by a third party insurer. These risks include but are not limited to:

  • General liability;
  • Commercial auto;
  • Professional liability;
  • Director & Officer Liability;
  • Errors & omissions;
  • Employment practices;

Emerging uses for captive insurance include risks for which insurance from third party insurers may not be available or available only at such high premiums as to make the coverage economically unfeasible. Further, captive insurance can be used to provide coverage for risks for which the liability is high but the risk of an occurrence is low.  Examples of the types of risks discussed in this paragraph include:

  • Cyber liability;
  • Supply chain or similar business interruption;
  • Equipment breakdown;
  • Intellectual property;
  • Product recall;
  • Environmental liability;
  • Earthquake;
  • Flood; and
  • Franchise impairment.

Use of captive insurance as an enterprise risk management tool is generally not limited by type of industry. Companies operating in industries as varied as:

  • Food and Agribusiness;
  • Energy and Natural Resources;
  • Health Care;
  • Transportation;
  • Manufacturing;
  • Technology;
  • Financial Services; and
  • Real Estate, Development and Construction,

can form subsidiaries to insure the particular types of risks that confront companies operating in those sectors of the economy.

Identification of the many benefits and risks of implementing and operating a captive insurance company is essential to a well thought-out management analysis.