What are the main differences between captive and self insurance

There's absolutely no doubting the fact that there are many attractive things about starting a business. You set your own hours, give yourself access to unlimited income potential, and begin to build wealth with real assets.

However, there's also a massive downside to starting a business: risk. Whether it's a customer lawsuit, a workers' compensation claim, or failed operations in a new market, every aspect of a company's operations has an inherent element of risk.

There are two principal ways that businesses insure themselves from realizing the full cost of a risk that has come true: self insurance and captive insurance.

In this article, we'll introduce you to both self insurance and captive insurance. We'll explain the differences between the two so you can determine which option makes sense for your business.

What is Self Insurance?

A company that chooses to self insure will put away its money in a savings account that is to be used whenever a risk is realized. Thus, it is easy to draw a parallel between self insurance and a savings account.

The principal difference between the two concepts is that money saved for self insurance has a very specific purpose. That is mitigating the cost of a risk that has come true. It cannot be dipped into for any other purpose, whether the company needs extra funding to enter a new market or something else. If a company draws from its self insurance account, then it exposes itself to the possibility of having no safety net. A risk that should be realized shortly after that withdrawal.

What is Captive Insurance

Captive insurance, on the other hand, works much the same way that any insurance program that you are familiar with may. A business approaches a captive insurance company and educates them regarding the risks of the business. The insurance company gives them a quote on premiums for coverage of those risks should they be realized.

Thus, in this second scenario, the company does not save money and put it away for a rainy day. It instead spends that money on an insurance company.

The principal benefit of captive insurance over self insurance is that depending on the policy limits that a company purchases, captive insurance can often cover a much larger percentage of losses created by the realized risk. However, the downside is that if a risk is never realized, all of that money that the business has been paying for its insurance premiums goes to naught. A self insured company would still have that money on hand to be used for other purposes.

Which Insurance Option is Right for You?

Now that you know the difference between self insurance and captive insurance, all that's left is for you to decide which kind of insurance program is right for your business. Assess your company's risks to decide which plan is a better fit.

For more business advice, be sure to check out the rest of the articles on the website!