Background
Owners with substantial holdings of multi-family real estate properties struggle with deciding on what type and level of insurance coverage is appropriate. Oftentimes, commercial insurance is either expensive, requires significant deductibles and/or has a number of exclusions in the policy. As a result, the owner winds up “self-insuring” by default a number of risks that may prove to be catastrophic.
The Risk
Owners of these properties forgo commercial insurance without any thought to an alternative. Any significant loss (ie. earthquake, flood, etc.) could meaningfully impact their balance sheet. There are also losses that may not be as severe but happen with much more frequency that are being self-insured (ie. termite/bedbug infestation, mold, pollution liability, etc). These types of risks are typically not covered under their commercial policies.
The Solution
A captive insurance company is an insurance company that is established to insure the risks of its owner and affiliated companies. When properly structured, premiums are tax deductible to the company and received tax-free by the captive. The captive serves as a more efficient method to self insure. As the captive receives premiums every year, the increasing capital and surplus serves as an efficient pool of assets for any future losses.
For larger real estate portfolios, the captive can also serve as a revenue generator. Tenant/Renters Insurance is a highly profitable product to the carrier. The owner of a captive can play a part in providing that coverage to the tenants in their properties, thus participate in meaningful underwriting profits.
A captive insurance company can be a very unique and flexible tool. It affords the owner a better way to manage their risks and protect their wealth.