Manufacturers have to manage a variety of risks, including equipment breakdowns, supply chain disruptions, regulatory changes, product liability and others. Plus, as manufacturers increasingly adopt the Internet of Things, artificial intelligence and other cutting-edge technologies, they are exposed to new risks, such as cybersecurity risks. Commercial insurance policies can be costly and may not cover all the novel risks manufacturers face today. One potential solution for reducing costs and filling coverage gaps is group captive insurance.

What they offer

Simply put, a group captive is a licensed insurance company owned and operated by the company or companies it insures. Captives are formed by a group of similarly situated companies to serve their members’ risk management needs. Captive insurance may replace — or, more commonly, supplement — existing coverage.

Group captives offer several significant benefits, including:

Cost Savings
Premiums are generally lower and more stable than comparable commercial policies.

Customization
Members can tailor coverage to meet their specific needs — including coverage for risks not traditionally covered by commercial policies — and avoid paying for unnecessary coverage.

Control
Group members have considerable control over the claims review process.

Income
As owners of the captive, members share in the captive’s underwriting profits and investment income.

Tax benefits

As with commercial insurance policies, members may deduct their premiums as a business expense. Plus, the captive’s underwriting profits are generally tax-free until they’re distributed to members.

Small group captives that qualify as “micro-captives” may elect to be taxed on only their net investment income — in other words, their premium income isn’t taxed. But be aware that the IRS is skeptical of micro-captives and may challenge certain arrangements as tax avoidance schemes.

Potential pitfalls

Group captives aren’t without their disadvantages. Among other things, they place additional administrative demands on members, who must learn about the insurance industry, comply with insurance regulations and share control with other members.

Also, manufacturers seeking to join or form a group captive may have to provide an upfront capital investment. Finally, participation in a group captive may complicate future merger and acquisition activity.

How to learn more

For many manufacturers, captive insurance can be a cost-effective, highly flexible risk-management tool. If you’re seeking an answer to high insurance costs, contact your insurance agent or broker, attorney, and financial advisor to determine if a group captive makes sense for your manufacturing business.

For more information, contact Seamus Donogue at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group. Sign up here to receive our blogs, newsletters and Client Alerts.