COST REDUCTION - Through ownership of a captive an organisation can participate in the profits and thereby reduce the overall cost of the risk programme. A captive's overheads are considerably lower than those of a traditional insurer generating further significant cost savings.
CASH FLOW - The captive can be flexible in the method and timing of premium payments. Subject to the incidence of claims and the requirements of any reinsurers, premium payments can be timed to fit in with the sponsoring organisations' own cash flow requirements.
INVESTMENT - The parent has control over the investment of premiums and other assets held by their captive. In some limited circumstances this can be used to further their business. Clearly all the investment income accrues to the benefit of the captive and its owners.
IMPROVED ACCESS TO INSURANCE MARKETS - The captive strengthens the parent's negotiating position due to its ability to reduce dependency on traditional markets. A group captive may take advantage of the greater negotiating power of larger volumes of premiums and provide a common solution to risk financing problems. Furthermore, as an operating insurance company, a captive has direct access to the reinsurance markets where the wholesalers of the insurance world operate. The difference between wholesale and retail insurance can be extremely important as reinsurers generally have more flexibility, lower overheads and less territorial restrictions than the retail insurers who deal directly with the public.
RISK MANAGEMENT - The captive focuses attention on the group's overall insurance and risk management programmes. It will centralise insurance buying, coordinating major decisions such as the levels of deductibles and the extent of coverage. The flexibility to develop tailor-made policies for individual business units within the group can still be retained and are likely to be competitively priced by comparison to the retail market. An important function of a captive is the facility to monitor the effectiveness of a risk management programme. Through the captive the gains achieved can be converted into bottom line profits that are easily recognised by senior management and shareholders. It also affords protection from cycles in the conventional insurance market.
PLACING DIFFICULT COVERAGE - There is often a particular coverage that is unusual or unattractive to traditional insurers and therefore difficult to obtain or just plain expensive. A properly designed captive can solve these problems and provide cover that might not be available elsewhere.
MULTINATIONAL PROGRAMMES - For international organisations a captive, particularly one that is offshore, can provide an extremely effective means of providing coverage at all locations. An international distribution system for insurance can also be very effective in reducing or avoiding the impact of tariffs and other restrictions that may be imposed in some jurisdictions.
TAXATION - Where relief against corporation tax is allowed, a captive is far more tax efficient than self-insurance. An offshore captive can also generate significant savings, if only in terms of tax deferment. Typically accumulation of investment income is tax-free providing fiscal efficiency.