THE MILLION DOLLAR QUESTION A MILLION DOLLAR CASH ADVANTAGE is exactly what a captive might mean to a surgeon at
beginning of a career. For a doctor well into a life's work, savings that might be achieved by use of a captive could well determine quality and point of retirement. How much? Without loss of one penny set aside in loss reserves for risk of professional liability, captive owners save at least one third or more of their cost for liability insurance.
JUST WHAT IS A CAPTIVE?
A Captive is a privately held insurance company formed for sole purpose of providing insurance to that company's owners. A captive is a corporation qualified by governmental authority to operate as an insurance company for limited purposes. A captive is administered in same manner as any other corporation in conduct of business.
It is important to note that although insurance affairs are usually contracted to experienced trades people for day to day operations, captive's owners should always maintain total control of all business decisions as well as captive's money accounts.
HOW DO CAPTIVES SAVE MONEY?
An insurance company reserve account is money set aside from premium dollars to pay future claims. Yet, this money is only a portion of premium dollars you pay. Added to funds for loss reserves are sales commissions, advertising and marketing expense and cost of company's administration overhead as well as an allowance for profit. Therefore as little as 55 or 60% of premium dollars you pay are actually set aside for purpose you pay them, to pay for future liability claims. A Captive will set aside same amount of money into reserves as a commercial insurance company. However, captive will eliminate most, though not all of commercial insurance company's expenses.
OTHER REASONS FOR FORMING A CAPTIVE:
The advantages of owning a Captive are well known to American industry and not for profit institutions. Only recently, due to legislative reforms, have captives become available to individuals and small groups. The various reasons for forming captives include:
Over a period of time, loss reserves become a sizable asset. The income from investment of those assets directly benefits shareholders of commercial companies. Owning company yourself means you benefit from investment of loss reserves.
If you cannot afford to bear loss of your own risk, owning a captive means you can access reinsurance market, which is effectively buying insurance wholesale. Owning a captive means you may determine how much risk you can afford each year and how much you wish to pass of to reinsurance companies.
