When an enterprise purchases insurance, the insurance premium paid can be deducted from the taxable income as the necessary cost of enterprise operation. However, the expenses at your own risk generally cannot be deducted from the taxable income. Even if the loss occurs at your own risk, as previously analyzed, due to its large annual scale changes, you may not get tax incentives. Therefore, it is natural for people to think of ways to let enterprises get the benefits at their own risk and tax benefits. Setting up a professional self-insurance company seems to be such a way, because after all, it is the enterprise that pays the insurance premium at this time. Of course, in many cases, the insurance premiums paid by enterprises to professional self-insurance companies cannot be deducted from taxable income as operating costs. Therefore, the establishment of professional self-insurance companies is rarely considered from the perspective of taxation, but tax consideration is indeed a motive for early people to set up professional self-insurance companies.
2. Meet the insurance demand
In the early days, people set up professional self-insurance companies because traditional insurance prevented people from obtaining some insurance. People may encounter three difficulties when using traditional insurance.
(1) Insurance may not be available in some cases. Enterprises can't buy insurance under limited circumstances, especially it is most difficult to obtain liability risk insurance, such as product liability, including medical liability, architect and engineer liability, accountant liability, pollution liability and other professional liabilities, as well as municipal administration, oil exploration and some dangerous contractors.
(2) The traditional insurance cost is too high. In some cases, although traditional insurance can be purchased, these insurances are expensive.
(3) Some risks are never insured. For some risks, the traditional insurance market does not provide any insurance at all, or there is no market with reasonable scale, including strike insurance, product guarantee insurance, product recall insurance and other risks that people think cannot be insured.
3. Reduce the cost of insurance
Although the initial motivation for people to set up professional self-insurance companies is because of the restriction of products in the insurance market and the hope of obtaining tax concessions, most of the professional self-insurance companies established in the past 30 years are based on a simple desire, that is, to reduce insurance costs.
With the increase of industrial capital value and risk cost, there is increasing pressure to find ways to reduce these costs. These pressures and continuous understanding of risk management make professional self-insurance companies attract people's attention as a way to save insurance costs.
Professional self-insurance companies expect to save insurance costs in the same way as general risk-taking. This includes some parts that can eliminate or reduce the composition of insurance premiums. In addition, professional self-insurance companies can also avoid the social burden of commercial insurance companies, which we have mentioned in the analysis of general risk-taking methods.
Professional self-insurance companies also reduce insurance costs by directly participating in the reinsurance market and avoiding the management costs of excess risks. We already know that general risk-taking measures must be combined with insurance, and the more common one is to buy insurance with excess risk. Some enterprises that adopt the risk-taking strategy can only buy insurance with excessive risks in the insurance retail market, and rarely enter the reinsurance market directly, because many reinsurance companies only deal with insurance companies, not non-insurance companies. In the same enterprise, after establishing a professional self-insurance company, the scope of insurance choice is much wider.
4. Hope to improve cash flow
Generally speaking, there is a long time interval between insurance companies collecting insurance premiums and taking risks and compensating for losses. People who buy insurance always feel that insurance companies enjoy the benefits of cash flow during this period. Only in the past 30 years, the cash flow benefits enjoyed by insurance companies have become the driving force for some insurance buyers to establish professional self-insurance companies. The main idea of these insurance buyers is to obtain the potential investment income of their insurance premiums by establishing professional self-insurance companies.
5. New profit center
Hundreds of professional self-insurance companies have developed into insurance companies and reinsurance companies, providing insurance services for other enterprises and becoming new profit growth points. Although it is far-fetched to take providing business to the outside world to obtain profits as the main motivation for establishing these professional self-insurance companies, it is indeed a kind of interest for enterprises and can be considered as support for other reasons for the formation of professional self-insurance companies. It is worth mentioning that although some professional self-insurance companies have indeed created profits for the parent company by providing insurance to the outside world, some have gone astray and even led to bankruptcy.
6. Help transfer funds in the international market
Some countries have strict foreign exchange controls, so it is difficult for funds to flow out of the country. Establishing professional self-insurance companies may become a way for enterprises to transfer funds. For example, China is a country with strict foreign exchange control. It has been several years since it joined the World Trade Organization (WTO), and its insurance market has been continuously opened to the outside world. In this way, it is possible for China enterprises to set up professional self-insurance companies abroad, buy insurance from their own professional self-insurance companies, and transfer their funds to foreign markets.