What is Captive Insurance?

Captive insurance can be defined as a form of self-insurance that is set up by a parent company to insure its own risks. In other words, it is an insurance company that is wholly owned by the insured. Captive insurance is also known as self-insurance because the parent company pays for the losses incurred by the captive insurer.

Unlike traditional insurance, where the insurer takes on the risks of many policyholders, captive insurance allows the parent company to take on its own risks. Captive insurance can provide a number of advantages to a parent company, such as reduced costs, control over claims, and improved risk management.

The Benefits of Captive Insurance

There are several benefits to setting up a captive insurer:

1. Lower Insurance Costs

Captive insurance allows a parent company to underwrite its own risks, which can result in lower insurance costs. The parent company can control the claims process and eliminate the profit margin that a traditional insurer would charge.

2. Increase in Control and Flexibility

Captive insurance allows a parent company to have greater control over its insurance program. The parent company can tailor the program to fit its specific needs and can make changes to the program as needed.

3. Improved Risk Management

Captive insurance allows a parent company to identify and manage its risks more effectively. The parent company can use the captive insurer to transfer its risks to the market and can use the captive’s resources to implement loss prevention programs.

4. Access to Reinsurance Markets

Captive insurance can provide a parent company with access to reinsurance markets, which can provide additional protection against catastrophic losses.

How Captive Insurance Works

A captive insurer is typically set up as a subsidiary of the parent company. The captive insurer is registered as an insurance company and is subject to the same regulations and oversight as other insurance companies.

The parent company funds the captive insurer by making premium payments. The captive insurer then assumes the risks of the parent company and creates policies to cover those risks. The parent company can control the claims process and can use the captive insurer’s resources to implement loss prevention programs.

The captive insurer can also invest its premium payments in a variety of investment vehicles, such as stocks, bonds, and real estate. These investments can generate income for the captive insurer and can help to offset the costs of claims.

Types of Captive Insurance

There are several types of captive insurance:

1. Single-Parent Captive

A single-parent captive is a captive insurer that is wholly owned by a single parent company. This is the most common form of captive insurance.

2. Group Captive

A group captive is a captive insurer that is owned by several companies in the same industry. The companies share the risks and costs of the captive insurer.

3. Association Captive

An association captive is a captive insurer that is owned by several companies that are members of a trade association. The companies share the risks and costs of the captive insurer.

4. Risk Retention Group

A risk retention group is a captive insurer that is owned by several companies in the same industry. The companies pool their risks and pay premiums to the risk retention group. The risk retention group is exempt from state insurance regulations and is subject to federal regulations.

FAQ About Captive Insurance

What is the difference between captive insurance and traditional insurance?

The primary difference between captive insurance and traditional insurance is that the insured has more control over its insurance program with captive insurance. The parent company can tailor the program to fit its specific needs and can make changes to the program as needed. Captive insurance also allows the parent company to underwrite its own risks, which can result in lower insurance costs.

Can any company set up a captive insurer?

Any company can set up a captive insurer, but it may not be practical or cost-effective for smaller companies. Captive insurance is typically set up by larger companies that have a significant amount of risk and can benefit from the advantages of captive insurance.

How much does it cost to set up a captive insurer?

The cost of setting up a captive insurer can vary depending on the size and complexity of the program. The costs can include legal fees, actuarial fees, and other expenses. The parent company should work with experienced professionals to ensure that the program is structured properly and that the costs are reasonable.

What types of risks can be covered by a captive insurer?

A captive insurer can cover a wide range of risks, including property damage, liability, workers’ compensation, and employee benefits. The parent company can tailor the program to cover its specific risks.

Is captive insurance regulated?

Yes, captive insurance is regulated by state insurance departments and is subject to the same regulations and oversight as other insurance companies. The parent company should work with experienced professionals to ensure that the program is structured properly and complies with all regulations.

Conclusion

Captive insurance can provide a number of advantages to a parent company, such as reduced costs, control over claims, and improved risk management. Captive insurance is a form of self-insurance that allows the parent company to underwrite its own risks and create policies that are tailored to its specific needs. Captive insurance can be set up in a variety of ways, including single-parent captives, group captives, association captives, and risk retention groups.