The desire for alternate risk financing has led to the creation of captive insurance. Captives are privately owned by businesses that front capital to protect themselves against loss. If an organization needs the flexibility of alternate coverage but cannot afford the expense of set-up and operation, rent a captive could be a viable option.
Structure of Coverage
The owners of a captive determine the structure of coverage, and can tailor it to specific needs. Premiums are invested for the benefit of the participants, providing capital gains for the members. Groups have access to reinsurance, and tax breaks are available for certain configurations. The result is more complete protection at a lower cost.
Renters in captives share in the advantages of individually structured insurance. It is especially helpful if they have been paying hefty premiums for policies that fall short of handling their particular requirements. More control allows coverage of uncommon or unusually high risks.
Risk Management Incentives
Instead of basing coverage on reported events in general, captive insurance addresses individual exposures and funds them in advance. Economic advantages of this system depend upon low frequency of claims. Participants in the group benefit from the members’ active measures to reduce incidents, as the results directly affect cash flow.
For a company with high insurance costs and limited capital, the alternative risk funding of rent a captive may be an optimal solution.