Many businesses require insurance beyond the means of a traditional insurance company. These businesses often consider forming a captive insurance company to provide their risk management. The benefits of this arrangement are significant. Now the parent company can have insurance for any risk they deem necessary. The costs of risk management are controlled and predictable as the literally work hand-in-hand with the insured company. The parent company will generally hold the preferred stock of the insurer subsidiary, realizing any excess cash above underwriting losses at the end of each year. The premium payments of the parent to the subsidiary are tax deductible, just as they would be to an independent, traditional insurer.
However, starting an insurance company takes significant capital, enough to offset the standard predicted losses of the type of industry it insures. This is regulated and closely monitored by the government to protect insurers from default. This startup capital is required, even if the company is a captive. For this reason many argue that a company with a captive insurer is not really self-insured – their insurance is still regulated by the government and offers the same risk protection as an independent insurer. This means that many companies will not be able to take advantage of their own captive insurer, and so take part in alternative programs. They can make a rent a captive arrangement with a captive insurer that accepts clients on the side. Then they can also take advantage of superior, esoteric risk management, and further realize the benefits of the associated tax deduction. Although limited as compared to an association with a captive, the rent a captive solution is often perfect for many companies.