Rent A Captive: Save On Insurance Costs
Rent a captive is steadily becoming a popular option for both big and mid-sized firms that clamor for more reasonable premium rates in the light of the skyrocketing cost of getting business and other forms of insurance. In layman’s terms, a captive is an insurance company established by a parent company for the sole purpose of underwriting the parent’s risky business. Since its establishment, such type of insurance has always carried with it an element of risk management.
It makes perfect sense to establish a captive for many reasons. First, the parent controls ever-rising insurance costs. Everyone knows just how dictatorial many surety corporations can be, especially the established ones. Many of them not only control the market; they also dictate the cost of getting insured. Unknown to insurance seekers, easily ten percent of every premium they pay go towards keeping the underwriter in business. Under a captive dispensation, this cannot happen. The parent has a huge say on how much premium is due and when.
Second, the captive, which is commonly a parent’s subsidiary in most situations, can generate revenues for the mother company. It accomplishes this feat by taking over the insurance business of the main company’s affiliates, other subsidiaries, partners, and even customers. What used to be a rare occurrence has become regular practice from the experience of corporations that have dared to participate in an experiment that the founding father, Frederic M. Reiss, invented in the 1950s in Ohio. These days, a promising aspect is the rent a captive business, which is showing the same trend of growth as the original concept.
Today, captive insurance has become a major revenue generator not only for the company that created it, but for the subsidiary’s location. Bermuda, Singapore, New York, Bahamas are just some of the revolutionary surety product’s prolific bastions. There is nothing illegal about getting into this type of business, although in the past, the tax man had been exceptionally wary of such practice. In the United States for example, tax laws had to be amended to avoid any special privileges landing in the hands of state-based operators. Although admittedly, the term captive still sticks out like a sore thumb, the business is completely legitimate and continues to be used by firms in high-risk situations like mining, fossil fuel exploration, space exploration, etc. The term captive was first used to refer to captive mines that were the first to be insured by this curious type of insurance at its introductory stage.
A third advantage of the Reiss initiative is the rent a captive component itself. With the introduction of this practice, medium-sized to even small companies can manage to put themselves under the umbrella of the cost-effective yet extremely reliable surety instrument that helps them manage risks, particularly the one having to do with loss of business. For his pioneering spirit, Reiss earned a posthumous Insurance Hall of Fame Award in 2007. It is well deserved, considering that his vision has set so many businesses and individuals free from the often-tyrannical grip of monolithic underwriters.
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