Company formed to insure the risks of its parent corporation. Reasons for forming a captive insurance company include:
Instances when insurance cannot be purchased from commercial insurance companies for a business risk. In many instances companies within an industry form a joint captive insurance company for that reason.
Premiums paid to a captive insurance company are deductible as a business expense for tax purposes according to the InternalRevenue Service. However, sums set aside in a self insurance program are not deductible as a business expense.
Insurance can be obtained through the international reinsurance market at a more favorable premium, with higher limits of cover age.
Investment returns can be obtained directly on its invested capital.
However, competent personnel to manage and staff the company could be excessively expensive; and further, a catastrophic occurrence or series of occurrences could bankrupt the company.