Business insurance needs are complex and often require several types of risk management strategies used in conjunction. Some of the options for businesses include forming risk retention groups or other captives. Although risk retention groups are a type of captive, these are the three reasons why other captives offer more advantages.
Amount of Capital
The amount of capital needed to set up a risk retention group vs captive is significantly higher, which can be problematic for companies that don’t have that much liquidity. Risk retention groups require at least $500,000 or more whereas captive requirements are typically far lower when domiciled outside of the U.S.
Location of Domicile
Risk retention groups can only be domiciled in the United States, but other captives have no such restriction. Certain countries offer more favorable tax laws and financial regulations, and captives are able to capitalize on those when risk retention groups cannot.
Types of Coverage
Because risk retention groups were set up by federal law, the types of risks they cover are limited to standard coverages with typical exclusions for losses like flood. However, captives cover those excluded risks or provide additional coverage for losses that cannot be underwritten in the traditional insurance market like damages from accusations of age discrimination or sexual harassment.
Risk management strategies that include captives offer more advantages than risk retention groups. However, as with any insurance product, it is important to consult experts to determine the right products for a company’s unique circumstances.