Advantages

• The use of a captive insurance company can result in a potential cost reduction. By participating directly in its own insurance business, an organisation can ensure that its premiums reflect its own position, rather than reflecting insurance costs of other organisations with inferior claims records. In effect it enables the organisation to share in the underwriting profit on its own insurance.
  
  
• Premiums paid to a captive are retained for the ultimate benefit of the mutually owned businesses. Therefore any investment income received from premiums, until they are paid out by way of claims or reinsurance costs, is retained for the shareholders.
  
  
• A captive insurance company may have direct access to the reinsurance market. This ability to deal directly with reinsurers can produce additional cost savings. The reinsurance market can also have additional capacity and a willingness to insure more difficult risks.
  
  
• The use of a captive insurance company has the effect of smoothing insurance costs over the medium term, whereas the insurance market can be very cyclical in premium costs and cover availability.
  
  
• A captive insurance company can enable the organisation to provide insurance for risks not otherwise easily covered in the conventional insurance market.
  
  
• The use of a captive can give a business cashflow advantages, as well as increasing the control of the business over claims and the insurance process in general.
  
  
• There may be tax advantages. A captive may prove to be a more tax-effective approach than simply self-insuring on a formalised basis. The extent of this advantage will vary between jurisdictions. Generally speaking, arm's length insurance premiums of captives, as with any other insurance company, are an allowable expense for tax in the country from which they are paid.