Captive Insurance: A Good Strategy for Your Business?

Timothy Moxie, CPA

The concept of insurance has been around for a long time. Over the years, businesses and individuals have used insurance as a form of risk management to hedge against the risk of a contingent loss with the primary intent being to transfer the risk of a loss from one entity to another. The cost of this risk transfer comes in the form of a premium.

Probably the most complicated aspect of insurance is the underwriting. Using a wide assortment of data and actuarial science, insurers predict the likelihood that a claim will be made against their policies and compute premiums accordingly. For a traditional insurance policy, a simplified calculation of profit is measured by taking the difference between the premiums collected plus investment gains minus amounts paid out in claims. Allocations of general overhead expenses will also need to be considered. Any profits and losses generated remain with the insurer.