Reasons for Setting up A Captive Insurance Firm
Captive insurance companies are set up as subsidiaries to manage the risk of the parent company. There are firms which pay high premiums for different risks, yet they are entitled to a small amount of claim which makes them consider having their own insurance company to save on this cost. Investors have highly benefited from this arrangement.
There is an accumulation of money where the premiums are not remitted to a third party but to a subsidiary which means that any profit made belongs to the group. This favors the company where the premiums are paid but there are no claims that are made in regard to the subject insured. Because the parent company is in full control of the insurance firm, correct premium price can be determined. This removes the aspect of being overcharged for the coverage.
You don’t have to take a general cover when you have a captive insurance subsidiary. It is possible to obtain an insurance policy for risks that have not been addressed in the traditional market. Customizing the services of the insurance company to meet the parent company is very important because the firm is assured of compensation if a risk happens. Offshore companies can receive the cover that is not available in the traditional market.
When the company identifies the right cover that is needed, the process of acquiring it is completed within a short time. Senior managers of the organization do not have to spend a lot of time negotiating the details of the cover with another insurance company. There is a smooth flow of information between the captive and the parent firm.
Where you have captive insurance the extent of risk is known. This is unlike when you insure using captive insurance where several companies are pooled together and have a different level of risks. Captive insurance helps to ensure that the right price is determined which is advantageous to the firm. It helps to avoid the problem of price fluctuations.
Parent companies put stringent safety procedures to guard against risks as lack of claims increase their profit margins. Companies do all they can to ensure that those risks which they can’t handle are mitigated. There are some risks which the company would feel uncomfortable to insure as the occurrence can bring havoc to the company. Proper management of risks ensures that the captive firm grows in revenue which is reflected in the parent company. This is because the captive earns income on premium which accrues to the benefit of the parent company in the long run. There is direct access to the reinsurance company. When the captive investment has grown incredibly then the firm reduces the portfolio it has reinsured which makes it save a lot of money.