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Debunking Captive myths

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Myth #1: A Captive is not legitimate

There are close to 6,500 Captives globally compared to roughly 1,000 in 1980. Over 90% of Fortune 500 companies are reported to own a Captive.

Myth #2: A Captive is a tax shelter

Under specific circumstances, Captives can offer their parents tax efficiencies, such as deductibility of premiums.

Myth #3: A Captive brings an administrative and resource burden to my business

While a Captive results in additional resource and administrative requirements, these should be counterbalanced against the benefits of the Captive and will be considered when conducting the feasibility study.

Myth #4: A Captive is expensive

The annual fees associated with a Captive typically range between $50k and $350k depending on size and complexity. There are also certain capitalization requirements associated with setting up a Captive.

It is however important to note that the insurance premiums are retained within the Captive and underwriting profits and gains from invested premiums that would typically benefit the commercial insurer now accumulate to the Captive and ultimately the shareholders. Costs and benefits should therefore be weighed-up against each other.

Myth #5: A Captive adds additional risk to my business

A Captive is a separate legal entity from the parent, and it is normal to build into any Captive program a degree of protection against adverse underwriting results; through loss prevention measures, lower risk retention levels, re-insurance programmes and an annual actuarial review.

Myth #6: Captives are only for big companies

A Captive becomes sensible when the insurance risk premiums (across all lines) exceed $1M.

Myth #7: If insurance is not available commercially, then it cannot be insured in a Captive

The most popular risks that are typically insured are All risk property, Casualty, Medical stop loss, Marine/Cargo and Extended warranty coverage. Any legitimate risk that the parent is subjected to can however be underwritten within the Captive construct.

Myth #8: A Captive can only be used for own risks

A Captive can be used to insure own, related parties and limited third-party risks, creating a profit centre for their parent organizations, diversifying the risk in their Captives, and improving relationship with end customers. Customers and vendors, meanwhile, can gain access to lower-cost coverages and build a better relationship with the Captive parent.

Myth #9: It takes long to set up a Captive

It takes approximately 60 days to set-up a fully functioning Captive insurance company. This includes performing a feasibility study, developing a business plan, obtaining regulatory approval, setting up the insurance company corporation, obtaining an insurance license, receiving premiums and issuing written insurance policies.