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.