In recent years, manufacturers have increasingly turned to group captive insurance as a strategic alternative to traditional insurance models. Commercial insurance policies can be costly and may not cover all the risks manufacturers face today. Those risks can range from equipment breakdowns and product liability to workplace safety issues.
Group captive insurance allows manufacturing companies to pool
their risks and stabilize costs. For companies with strong risk management
practices, the financial benefits of participating in a group captive can be
significant.
What is group captive insurance?
Simply put, a group captive is a licensed insurance company
owned and operated by the companies it insures. Captives are formed by a group
of similarly situated companies to serve their members' risk management needs.
They offer several significant benefits, including:
Cost savings.
Premiums are generally lower and more stable than comparable commercial
policies.
Customization.
Members can tailor coverage to meet their specific needs — including coverage
for risks not traditionally covered by commercial policies — and avoid paying
for unnecessary coverage.
Control.
Group members have considerable control over the claims review process.
Income. As
owners of the captive, members share in the captive's underwriting profits and
investment income.
Captive insurance may replace — or, more commonly, supplement —
existing coverage.
What are the tax benefits?
Members of group captives may deduct their premiums as a
business expense, just as they can with commercial insurance policies. Plus,
the captive's underwriting profits are generally tax-free until they're
distributed to members.
Small group captives that qualify as "micro-captives" may elect
to be taxed on only their net investment income — in other words, their premium
income isn't taxed. But be aware that the IRS is skeptical of micro-captives
and may challenge certain arrangements as tax evasion schemes.
Beware the pitfalls
Group captives aren't without their disadvantages. Among other
things, there are additional administrative demands: Members must learn about
the insurance industry, comply with insurance regulations and share control
with other members.
Also, manufacturers seeking to join or form a group captive may
have to provide an upfront capital investment. Finally, participation in a
group captive may complicate future merger and acquisition activity.
Does a group captive policy make sense?
Group captive insurance can be a highly flexible risk-management tool for manufacturing companies seeking an answer to high insurance costs. However, it's not right for every manufacturer. Contact us to learn more about group captive insurance and whether it might be a good fit for your company.