Utilize Captive Insurance Companies to Up Cash Flow

by Kevin Hatrick

Small business owners are always looking for ways to protect against catastrophic risks while improving cash flows. One tool that can help you do both is using a captive insurance company.

A captive insurance company is a small insurance company created by a business to help hedge against specific risks – generally risks that a company cannot protect against using available insurance, such as supply-chain interruption or key employee loss. It is an increasingly popular tool for risk management, currently being used by over 90% of Fortune 1000 companies. By creating and using a captive insurance company, a business essentially pays insurance premiums to a company they own. The insurance company then keeps that money available – usually in low risk investment vehicles – to be used to protect against the specified risks if and when they occur.
There are three main advantages of captive insurance:

  1. Increased protection – Captive insurance companies allow businesses to be ready for business disruptions that would previously have gone uninsured. Also, because captive insurance inherently offers financial rewards for effectively controlling losses, safety and loss control get a higher level of attention.
  2. Improved profitability – There are a number of ways in which captive insurance companies help businesses increase profitability.
    a. They provide the opportunity to capture investment income from the reserves.
    b. They reduce the expense factors associated with commercial insurance.
    c. They minimize the impact of specific losses and risks.
  3. Tax savings – Captive insurance companies can elect to be taxed only on its investment income and not on the insurance premiums it receives. This allows for potential short-term and long-term tax savings opportunities.

If you want to minimize risks while simultaneously improving cash flows, protect your business against disruptions, increase profitability, and increase your company’s tax savings; using a captive insurance company can be extremely beneficial. If you think this may be an option for your company, consult with your tax professional for more guidance.

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