Captive insurance companies are specialized insurance companies established with the specific objectives of financing risks emanating from their parent group or groups, but will occasionally insure risks of the group’s customers as well.
Basically, utilization of captive insurance is a risk management technique by which a business forms its own insurance company subsidiary to finance its retained losses in a formal structure.
A special purpose insurance company owned by a corporation or group whose primary objective is to insure its own exposure and the exposures of its affiliates.
Captives can be viewed as an alternative form of risk management that formalizes the captive owner’s self-insurance process and risk financing approach.
Unlike a pure captive insurance company, segregated accounts are organized as sponsoring organizations (i.e., insurance companies, insurance brokers, captive management companies) that for a fee ‘rent’ the capital, license and underwriting infrastructure needed to facilitate a captive insurance plan. Capable of writing direct insurance and reinsurance, segregated accounts divide their client’s risk(s) into ‘cells’ that are legally separate and distinct from one another. Each cell is managed independently by the sponsor, such that all underwriting profits and investment income generated on reserves can be returned to the client according to previously agreed distribution schedules. Frequently cells are structured as reinsurers that allow clients the ability to assume and retain a portion or all of a specified business risk. In contrast to owned captives, segregated accounts strive to protect their capital by requiring cell owners to post collateral, sometimes in an amount up to the maximum policy limit. Collateral is usually provided in one of three forms: cash, LOC or a New York Regulation 114 Trust.
- Single Parent Captive: Insurance or reinsurance company formed primarily to insure the risks of its parent or affiliates.
- Association Captive: Captive insurance company that is owned by a trade, industry or service group for the benefit of its members.
- Group Captive: Company jointly owned by a number of companies that is created to provide a vehicle to meet common insurance needs.
- Agency Captive: Company formed by an insurance agency or brokerage firm to share in the risk and profits generated on business they broker.
- Segregated Account/Protected Cell (Rent-a-Captive): An already established captive insurance company that offers its captive ‘facility’ to others for a fee, while protecting itself from liabilities that may be generated from others participating in the facility. This type of captive arrangement is often, but not always used for programs that are too small to justify the costs and time commitment required to establish their own captive.
- General Liability
- Workers’ Compensation
- Property
- Financial Lines
- Accident & Health
- Differences in Conditions/Limits
- Pollution Liability
- Travel Accident
- Employee Benefits
- Extended Warranty
- Credit Life/Disability
- Credit Risk
- Enhances control over owner’s risk(s)
- Often reduces and stabilizes insurance costs
- Retains underwriting profit & investment income generated from reserves
- Funds risks that would otherwise be uninsurable
- Provides access to lower cost reinsurance market
- May improve long-term cash flow
- Incents Good Risk Management
- Tax considerations if properly structured
Examples of captive structures can be found in our brochure.