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Risks in any business range from those that are hidden or inherent in the business operations and those risks that are usually omitted in the insurance conventional policies. Most businesses and firms tend to adopt self-insurance either unknowingly or knowingly to insure their risks. In Self-insurance, the business lowers the expenditures in order to take control of the low level risks within that organization. In Self-insurance, the organization or firm assumes the role of the insurer. Captive insurance is suitable to any firm compared to the self-insurance because it enables the pre-funding of the future losses (Reeve & Brian, 2004)._x000D_
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With a captive insurance, the self-insured risks can be covered with policies that are paid premiums at the cost of deducted taxes. In case the insurance claims are lower than they had been projected, the captive is allowed to retain the profits which are then distributed to the owners on a basis of tax advantageous or the profits can be used to settle other claims._x000D_
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Captives are mostly used by many firms as an alternative to the Self-insurance. The Captives have been existence for centuries due to its widespread acceptance since its market is active. A captive is a fully owned subsidiary that is created with an aim of providing insurance cover to their non-parent insurance companies. They are also established to meet management risks of the owners of the captive or the members (Barrett, 2012)._x000D_
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Once a captive is established, it operates just like any other insurer where it collects premiums, issues policies and pays claims. The difference of a captive from other insurers is that the captive does not offer insurance packages to the general public._x000D_
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Captive Insurance. Captive insurance is that insurance that is provided by an insurance or reinsurance company so as to cover the assets and risks of the parent company or companies. Captive insurance is not available to the public because it is of insurance or reinsurance companies with limited purposes. Captive insurance is where an insurance company provides insurance covers, and it is controlled by its owners. Captive insurance serves as a system of self-insuring against losses of the parent company. Captive insurance can be owned by an association or even a corporation._x000D_
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Types of Captive Insurance. There are different types of captives and the one that a firm (or an organization) decides to choose depends on the needs of the owners or the parent company. The most common captives are Single-Parent captives, Group Captive, Association Captive, Rent-a-Captive, and Risk Retention Group. A single-parent captive is also referred to as the pure captive, and it only includes the risks of the parent organization (Sammer, 2011)._x000D_
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Group captive is established between firms (or companies) that have similar business activities and only account the risks of the owners and/ or affiliates. Association captive is similar to the group captive only that the association captive is owned by a group of entities within an organization and they have similar insurance needs._x000D_
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The Rent-a- Captive is owned by an organization that is based outside and opens to be part of it after paying a fee. The Risk Retention Group is an association of group captive whose principal aim is to spread and assume risks for commercial liabilities._x000D_
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Regulation of Captive Insurance. A captive is different from any commercial insurance company because it serves the parent companies. Moreover, the captives do not serve the general public as it is the case in commercial insurance companies. The main purpose of regulation in insurance regulations and rules are to the policy holders, stakeholders and investors (Lewis, & Shayne 1999). Just like the traditional insurance companies, insurance captives are regulated by the state where its headquarters are located._x000D_
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Importance of Captive Insurance. Captive insurance helps to reduce and at the same time stabilize the premium rates. It is also beneficial as it enables the insuring of the uninsurable and it has cash flow benefits. It has a potential of tax benefits, enables direct access into the reinsurance markets and facilitates the consolidation of deductibles. Captive insurance is also vital because it reduces the dependence on the commercial insurers and serves as an insulator to the organization enabling to be insured against the market cycles (Christine & Brian, 1995)._x000D_
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How to Set Up a Captive Insurance. The first step in setting up a captive is consulting the insurance brokers for advice on how to conduct a feasibility study. What follows is the selection of a licensed captive manager then the application together with a business plan is filed to the Regulator of insurance. Director of the captive insurance are identified, and the organization is incorporated where a bank account is opened, and an auditor is selected (Wilson & Wesley, 2006)._x000D_
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After this, application is resubmitted with documents and the auditor’s certificate. After the resubmission, the license can be obtained. When all this has been completed, credit and reinsurance trust facilities are set up by the investment manager._x000D_
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A detailed and proper feasibility study is necessary, and it should take into consideration all the risk-funding substitutes. Even though, a feasibility study is now a legal requirement, it is necessary to select the project losses, domicile and provide support for the business plan._x000D_
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Captive insurance can be termed as a form of self-insurance that that aims at reducing the business costs. It is beneficial because it enables companies to be more involved in management, control of losses and financing of risks. A close connection between a company and the captive enables claims to be settled faster, and this explains why a captive is crucial. Another advantage of a captive is that companies that form the captive can merge to form a captive band. By merging, they are able to acquire traditional insurance and hence the captive band benefits from lower cost by purchasing as a group. A captive insurance serves only few customers, and this is particularly notable because it is more responsive than the large insurance companies which are serving many clients._x000D_
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Self-Insurance_x000D_
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Self-insurance is a business strategy whereby an organization or company sets aside funds that will be used for its own risks unlike the other way where an insurance company relies on an insurer (Catanese & Joseph, 2001). Self-insurance can be used in any class of risk ranging from workers compensation to assets. Those organizations that are ready and willing to self-insure the responsibility of claims that can either be internal or external. In self-insurance, the business aim is to lower the premium expenses and also the risk levels within the organization. This is where the business assumes it is the insurer, and it will bear the responsibility in case a risk occurs. The business will create a fund where the funds are managed to assert any claims (Brigati & George, 1996)._x000D_
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In self-insurance, an organization opts to retain some of its potential risks rather than those risks to a third party such as an insurance company. This means that the company will pay any losses that will arise from the risks. It is extremely unusual for any organization to totally self-insure itself because this means that it will have to carry one hundred percent of the risks (Walkup, Huntington & Richard 1993). Even that company with strong and healthy balance sheets sometimes they tend to use conventional insurance covers._x000D_
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Benefits of Self-Insurance. Self- insurance can also be beneficial in terms of saving costs. This is because the main aim of Self-Insurance is mainly to improve the operating profits of a company by minimizing the premium costs. By means of undertaking the role of an insurer, a self-insuring company is capable to retain profits, policy administration costs as well as the assumption of risk costs. Moreover, a company’s Self-Insurance strategy plays a vital role in enabling a company to avoid residual market loadings and premium taxes charged by insurer premiums._x000D_
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In self-insurance, the firm will hold onto the money until all the claims have been settled. This gives the firm a cash flow advantage, whereby the firm can enjoy higher savings and avoid payment of premiums in advance. The savings can be used as the working capital by the firm rather than monthly premiums (Segalla &Thomas, 2002). It is also advantageous to the firm where it enables the exemption of taxes._x000D_
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Furthermore, Self-Insurance plans create conducive workplace since a company that ensures workplace safety and protects the health of employees achieves a high level of morale among employees, and this translates to the overall increase in productivity because employees perceive the employer as a care provider._x000D_
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Legislations on Captive Insurance. The reinsurance firms have been supporting the captive concept. A captive is established to reinsure or insure deductibles of the parent insurance policy, and through this insurance; the captives are able to reinsure coverage at much lower costs. Captives are allowed to operate from anywhere in the chain of insurance (Moody & Michael, 2006). The economic life cycle of a captive insurance owner can affect the insurance risk levels and these are retained in the captive entity. Most companies have turned to captives as solutions to their business problems._x000D_
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Conclusion_x000D_
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Captives were essentially created to solve problems that companies were facing. Many companies would find it hard to afford insurance coverage, and that is why they decided develop the captive fund. A captive is rather more helpful to a firm than a self-insurance since it is an insurance or reinsurance entity that is indirectly or directly created an owned by one or more firms, companies or organizations. A captive is not an entity that provides insurance or reinsurance covers to those entities that it belongs to or other entities that are connected with it. A domicile is the jurisdiction under which the captive is incorporated and regulated._x000D_
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In the United States, the federal state has revised its captive laws that are attractive to the formation of captive insurance companies. Captives are particularly noteworthy in any state because they promote the creation of professional forms of jobs, and also increase the tax revenue that is earned._x000D_
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Those industries with the highest number of captives are manufacturing, real estate, finance and construction. When a corporation forms a captive, it normally organizes it as a subsidiary. Today, the formation of captives is continuously rising and most of the companies are establishing captives for the purpose of reducing cost, managing and controlling risks._x000D_
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Captives aim to mitigate exposure of firms or organizations to many of the risks. Practically, every risk that has been underwritten by a commercial insurer is eligible to be provided with a captive. A captive is crucial for any organization since it also provides specialized coverage for the unusual cases or risks that are hard to insure such as terrorism. Unlike the traditional insurance industry, captives are effective as they are able to meet every of the management risks that may occur in a company or organization. However the insurance captive in today’s market is more diverse than when it began.