Understanding Insurance Captive

Insurance captive is a type of self-insurance whereby an organization creates and owns its own insurance company instead of buying insurance from other companies. In insurance captive, the organization defines its own insurance policy and underwriting standards, sets premiums, and invests any premiums not used to pay claims. The main aim of insurance captive is to reduce the cost of insurance and provide greater control over risk management.

How Insurance Captive Works

Insurance captive is usually set up by large organizations that have high-risk exposures and pay significant premiums to commercial insurance companies. The organization creates a subsidiary that will act as the insurance company and sets up an underwriting policy, which outlines the risks that the subsidiary will insure and the premiums to be charged.

The subsidiaries of insurance captives typically have a board of directors that manages the company’s underwriting activities, and this board is typically made up of members of the parent company’s management team. The parent company provides initial capital for the subsidiary, which is then used to pay claims, invest in securities, and cover any other expenses that may arise.

The subsidiary receives premiums from the parent company, which is then used to pay claims. If premiums exceed claims, the subsidiary can invest the excess premiums in securities or other financial instruments. The subsidiary can then use the investment income to pay future claims or return profits to the parent company.

If claims exceed premiums, the subsidiary can either increase premiums or use its investments to make up for the shortfall. Insurance captive provides organizations with greater control over their insurance coverage and risk management, as they have more say in the underwriting process and can customize their policies to better suit their needs.

Types of Insurance Captive

There are several types of insurance captive, each with its own unique features and benefits. The most common types of insurance captive include:

Single Parent Captive

A single-parent captive is an insurance company that is wholly owned by a single parent company. Single-parent captives are most commonly used by large organizations with high-risk exposures, and they provide greater control over insurance coverage and risk management than traditional insurance policies.

Group Captive

A group captive is an insurance company that is jointly owned by several parent companies. Group captives are typically used by smaller organizations that cannot afford to set up their own insurance company, and they provide cost savings and greater control over insurance policies than traditional insurance policies.

Association Captive

An association captive is an insurance company that is owned by members of an industry or trade group. Association captives are most commonly used by small and medium-sized companies that share similar risks, and they provide cost savings and greater control over insurance policies than traditional insurance policies.

Benefits of Insurance Captive

Insurance captive provides several benefits to organizations, including:

Cost Savings

Insurance captive can provide significant cost savings to organizations, as they can avoid paying premiums to traditional insurance companies and use the surplus to pay for claims or invest in securities.

Customized Policies

Insurance captive allows organizations to customize their insurance policies to better suit their needs and risk exposures. This can result in better coverage and lower premiums than traditional insurance policies.

Greater Control Over Risk Management

Insurance captive provides organizations with greater control over their risk management, as they have more say in the underwriting process and can tailor their policies to better fit their needs.

Frequently Asked Questions (FAQs)

In conclusion, insurance captive is an effective way for organizations to reduce the cost of insurance, customize insurance policies, and have greater control over risk management. There are several types of insurance captive, each with its own unique features and benefits, and organizations should carefully consider their options before deciding on the best type of insurance captive for their needs.