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Captives for Manufacturing

Cutting edge solutions for complex needs.

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Spotlight on: Captives for Manufacturing

Guiding growth. Guarding assets.

In today’s dynamic global market, manufacturing companies are seeking innovative solutions to navigate the intricacies of risk management. Captive insurance is one such solution, representing a fresh approach to risk management and financing. Its flexibility and potential cost-effectiveness have only become more appealing due to the challenges of a hard market, high liability costs and the impact of the COVID-19 pandemic.

What is captive insurance?

With a captive insurance program, businesses establish their own insurance companies, either by themselves or alongside other businesses. Creating a captive insurance company can allow manufacturers to exercise greater control over their insurance expenses and to better align coverage to meet their needs.

Through a captive insurance program, premium dollars are invested, rather than being forfeited to a traditional insurance company. This helps facilitate prompt access to funds in the case of a claim and can provide investment income to the business or businesses involved in the captive.

Manufacturing companies may benefit from captive insurance by:
  • Establishing their own insurance entities, either independently or in collaboration with other companies
  • Gaining enhanced control over risk management and claims handling
  • Accessing financial benefits from tax advantages and investment income
  • Reducing the high premiums associated with traditional manufacturing insurance policies

Single Parent Captives vs. Group Captives

A single parent captive, also known as a pure captive, is under the sole ownership, financing and control of a single parent company. It is specifically designed to provide insurance coverage for the parent company and its affiliates. For larger manufacturing businesses or companies with many affiliates, single parent captives offer the flexibility to consolidate a range of coverages under one umbrella while addressing both general and industry-specific risks.

A group captive insurance program is established when several businesses come together to create their own captive insurance company. Each business becomes a member-owner in the captive insurance company, enabling collaborative decision-making and the sharing of risks.

In both cases, a captive insurance company operates like a traditional mutually-owned insurance company with A-rated carriers that issue policies, process claims and follow applicable regulations.

Advantages of Captive Insurance

There are many potential benefits to captive insurance for manufacturing companies, such as:

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Lower Insurance Costs

By retaining a portion of their insurance premiums and gaining more control over insurance coverages, manufacturing companies have the opportunity to cut down on insurance costs through captive insurance. Within manufacturing, this can be a significant advantage: due to the industry’s higher rates of worker injury and death, companies may be subjected to higher insurance premiums with standard policies. However, with captive insurance, your manufacturing company can leverage your individual loss records to potentially help your business secure lower premiums.

Improved Cash Flow and Investment Income

Manufacturing businesses can utilize captive insurance as a means to boost cash flow. By enabling companies to retain and invest their insurance premiums, captive insurance has the potential to create an additional source of income through the accumulation of capital and strategic investment of premium funds. This not only contributes to improved cash flow, but also generates investment returns on loss and unearned premium reserves – a benefit not available in traditional insurance models.

Customized Coverage

The provision of customized coverage that caters to the specific requirements and risk profiles of manufacturing companies is a major advantage of captive insurance. Traditional commercial insurance policies may come with standard coverage that may not be necessary for manufacturing businesses and may add unnecessary costs. Captive insurance can allow for both the removal of unnecessary standard coverage and the addition of coverage that specifically addresses the company’s requirements.

Financial Efficiency and Tax Benefits

Captive insurance has the potential to improve financial efficiency by helping manufacturers retain funds within their financial ecosystem, facilitate risk retention and self-sufficient financial structures and take advantage of tax benefits. Manufacturing businesses can benefit from captive insurance through the full deductibility of premiums paid to the captive, as well as the fact that captives are not taxed on premium income. This potential for significant tax advantages can enhance the longevity and profitability of the captive insurance company.

Stable Pricing for Insurance Policies

As a captive insurance company matures and stockpiles more capital, the captive bolsters its ability to manage risk and shield itself from fluctuations in the commercial insurance market, allowing for more stable premium pricing. The stability that a captive insurance company can provide can offer manufacturing businesses a safeguard from the unpredictability and sudden premium increases often associated with traditional insurance.

Access to Reinsurance Markets

Captive insurance can open the doors to reinsurance markets. By functioning as a primary insurer, a captive insurance company can procure reinsurance from the commercial reinsurance market and offload a portion of their risk to reinsurers to more effectively manage their risk and support their financial stability.

Control Over Insurance Claims

Another advantage of captive insurance is the control it offers over insurance claims. As the parent company of the captive insurance entity, your manufacturing company can have more control over and transparency during the claims process. With a captive program, your insurance experience is not solely in the hands of traditional insurance companies; it also lies with the company that understands its risks the best – the manufacturing company itself.

Why Higginbotham?

At Higginbotham, our deep industry knowledge allows us to provide customized coverage that aligns with the specific requirements and operational risks of manufacturing businesses. But, more than that, once we’ve established your group or single parent captive program, we offer year-round support, including:

  • Financial assistance, including captive financial education, underwriting and renewal support and member assessment review
  • Risk management services, including compliance, certificate management and more
  • Loss control support, including OSHA assistance, specialized training and education resources

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Commercial Insurance Policies Under a Captive

A captive insurance program can incorporate a broad spectrum of insurance policies in the commercial insurance market, including:

Why Zoeller Pump Company Chose a Group Captive

With Higginbotham’s help, Zoeller Pump Company transitioned to a group captive insurance plan and optimized its risk management strategies. Learn how Higginbotham played a pivotal role in demystifying the concept of captives and setting up this innovative captive model for a business operating in the manufacturing industry.

Potential Challenges in Captive Implementation

As with any business venture, there may be challenges that come with the implementation of a captive insurance program, and our specialists keep these in mind when establishing and maintaining your organization’s captive. Some potential challenges in captive implementation include:

Regulatory Compliance

One major challenge with captive insurance is ensuring regulatory compliance. Companies must navigate licensing requirements, different regulatory environments and ensure compliance with tax laws. This process can be complex and often requires a deep understanding of the regulations governing both the manufacturing industry and the captive insurance landscape. At Higginbotham, we leverage our knowledge and experience in both areas to help you navigate the complexities of captive regulatory compliance.

Financial Support and Management

Another challenge in implementing captive insurance is ensuring adequate financial support and effective financial management. A captive insurance program typically has higher start-up costs than a traditional insurance policy, making comprehensive financial planning crucial from the beginning. Our team offers year-round financial support that includes assistance with underwriting, renewal, investment income, member assessments and more.

Claims Advocacy and Loss Control Support

Claims advocacy and loss control support are essential for ensuring the quality of service in a captive insurance program. However, these areas can be challenging due to regulatory requirements, potential disputes between the captive and the parent company and the need for precise insurance pricing and claims adjudication. That’s why, at Higginbotham, we offer comprehensive support for captive claims, including TPA claims renewal and analysis, quarterly reviews outside of TPA standard reviews and a dedicated claims unit.

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Empower Your Manufacturing Business with Higginbotham

At Higginbotham, we pride ourselves on delivering captive insurance solutions tailored to your manufacturing business. Our suite of services for manufacturing captives includes ongoing support and guidance in setting up and managing both single parent captives and group captives.

Talk to a member of our team today and discover how Higginbotham can be your partner in navigating the complex world of captive insurance.

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