Disadvantages of a Captive
- - Establishing a captive insurance company requires
a substantial amount of initial capital to ensure that the captive remains financially healthy during tumultuous times.
Rent-a-captives mitigate capital outlays but typically require long-term participation to make it worth the while.
- - Establishing a captive insurance company requires time and
resources of relevant internal personnel.
- - The quality of service that a captive offers depends on the quality
of third-party service providers that it utilizes.
- - When actual losses exceed initially expected levels, captive
insurance companies might need additional funds to be allocated. If risks are not well-assessed initially, the captive owner
could suffer adverse financial consequences.
- - The IRS has progressively implemented stringent tax policies over time that have reduced
much of the tax benefits originally enjoyed by captive owners.
- - Although captive insurance can provide excellent
solutions for particular lines of coverage, it can cause other lines to increase in price if favorable coverages are shifted to the
captive and unfavorable coverages are left in the commercial market.
