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The Blueprint

Captive Reinsurance 101

In the world of risk management, the right insurance is crucial. Conventional options can often lead to costly detours or offer limited choices, presenting a challenge for businesses navigating this dynamic landscape.

Captive reinsurance can serve as a strategic advantage, bridging gaps and delivering a wealth of benefits to employers.

What is Captive Reinsurance?

Captive reinsurance is a form of risk coverage provided by a captive insurance company, which operates much like a commercial insurer. Its primary focus lies in providing an accessible way for smaller employers to self-fund by removing some of the risks involved. This is made possible by banding together similar companies into a singular buying group. Combining with other companies increases the overall member population of the captive allowing for increased negotiating power, lower impact of shock claims, and higher savings potential. Beyond risk mitigation, participating in a captive can yield substantial tax benefits and investment opportunities.

Understanding Captive Reinsurance

Captive reinsurance is a critical component of the captive insurance models, playing a key role in risk management for organizations. It involves a specific arrangement where the captive insurance company purchases reinsurance coverage, effectively acting as a reinsurer for its own insurance policies.

Captive Reinsurance Operations

The captive reinsurance company transfers a portion of the risk to each captive participant in exchange for a premium. If a covered loss occurs, the reinsurer pays a portion of the claim, reducing the financial impact on the captive insurer.

Captive Reinsurance Then and Now

For over half a century, businesses, including many FORTUNEĀ® 1000 corporations, have turned to captive insurance companies to effectively manage a variety of risks. Initially, it emerged in the 1960s to cover risks that the commercial insurance market was hesitant to fully cover.1 Over time, captives expanded to include employee benefits.

Advantages of Using a Captive for Employee Benefits

Employers with captive reinsurance can enjoy many benefits that extend beyond conventional insurance models, including:

  1. Cash Flow Management: Captive reinsurance allows companies to retain underwriting gains, which would typically go to a traditional insurance carrier. This can improve cash flow and potentially lead to cost savings.
  2. Investment Gain: Captives can hold reserves and invest them. This allows companies to potentially earn more on their investments than they would if the funds were held by a traditional insurer.
  3. Tax Benefits: When structured appropriately, captives can provide tax advantages to parent companies. This may include deductions for premium costs and benefits related to property and casualty coverage.
  4. Customized Coverage: Captives can provide tailored coverage solutions that may not be readily available in the commercial insurance market. This allows companies to address specific and unique risks.
  5. Long-Term Stability: Captive reinsurance can provide a more stable and predictable cost structure for insurance coverage, reducing the potential for significant premium fluctuations.

Ongoing Captive Management

Creating a successful employee benefits captive reinsurance program requires preparation, pre-implementation, and execution. Once implemented, the captive reinsurance arrangement involves a reporting and settlement process. This step ensures that both parties have a clear understanding of insurance risk assessments and reserves.

Considering Captive Reinsurance?

At RMTS, we offer captive reinsurance to help secure greater long-term cost stability. Reach out to learn more today.