The industry has witnessed a growing interest in captive insurance among organizations that seek greater control over insurance premiums and risk management, with coverage of unique areas in recent times. Although ‘captive’ shows a skyward recognition, there are widespread misconceptions around captive insurance matters, as per Charles Spinelli.
Such confusions often prevent businesses from exploring more that could bring them long-term operational and financial benefits. Clarifying these misunderstandings can be helpful for organizations to make informed decisions on it.
Myth 1. Captive Insurance Is Meant Exclusively for Big Corporations
Among these common misconceptions, the foremost one is that captive insurance is ideal for large-scale businesses or multinationals. Although historically, captives were used by big houses, now, mid-sized businesses are also turning to group captives, which can be formed by a set of smaller companies.
In reality, with changes in regulations and advancements in professional management, group captive models have made the model easily accessible to medium-sized organizations. Thus, for businesses working with unique risk profiles, consistent risk management practices can leverage their benefits irrespective of their size.
Myth 2. Captives Are Ideally a Tax Avoidance Tool
According to Charles Spinelli, the second widespread belief is that captive insurance is formed chiefly to avoid taxes. Given the primary objective of a captive is risk management, it can help businesses to manage risk according to legal standards. Consistent regulatory practices demand captives to establish themselves as a legal insurance entity and comply with proper underwriting, risk distribution, claims handling, and yearly audit. Therefore, persevering captives solely as tax shelters is a completely vague idea.
Myth 3. Captive Insurance Is Too Risky
Some companies may believe that setting up a captive will subject them to unnecessary financial risk. The truth is, captives are meant to be a risk management solution for companies. By offering customized risk coverage, enhanced loss prevention, and reinsurance market access, companies are often left with reduced risk exposure. Loss analysis and forward-thinking risk management practices can give companies a sense of predictability and control when it comes to insurance risk results.
Myth 4. Captives Are Extremely Difficult to Manage
There has been an impression that captive insurance companies are rather complicated to manage. This may be true because captives need proper management, compliance, and reporting. This, of course, is managed by experienced captive administrators. They handle all compliance and regulatory work that needs to be filed and reported. In fact, nothing really difficult needs to be accomplished in-house.
Myth 5. Captives Eliminate the Need for Commercial Insurance
Another myth surrounding captive insurance is that it fully replaces commercial insurance. On the contrary, it often complements and follows commercial insurance programs. For example, organizations set up a captive insurance to cover certain risks or higher deductibles and utilize the services of a commercial insurer for catastrophic outcomes. It provides a well-rounded approach to risk management.
Conclusion
The captive insurance model is often confused owing to old-fashioned assumptions and imperfect information. By having a clear insight into common myths, businesses can reap the benefits of insurance aligned with their unique risk, avail tax benefits, and financial strategies.
