Haris Ashley
Captive insurance companies are a form of self-insurance that came into existence due to difficult markets. They are typically established to meet the unique risk-management needs of their owners or members, and to provide potentially significant tax advantages. Captives can be set up in various ways, including as non-sponsored or sponsored captives. Non-sponsored captives are created and owned by the insured company, while sponsored captives are owned by another company that rents insurance to other companies. Captives can be owned by a single company or a group of companies from different industries, and they are subject to state regulatory requirements and must maintain sufficient funds to pay claims.
| Characteristics | Values |
|---|---|
| Definition | A captive insurance company is a wholly-owned subsidiary that provides insurance to its non-insurance parent company. |
| Formation | Captives are formed when products offered by insurers do not meet an insured's risk financing needs. |
| Ownership | Captives are typically owned by their policyholders. They can also be owned by a group of insureds from different industries. |
| Control | Captives offer increased control over insurance-related services such as safety, loss control, and claims administration. |
| Risk Management | Captives provide flexibility in managing risk, allowing companies to retain and control their risk management programs. |
| Pricing | Captives can achieve pricing stability over time as they expand their risk retention capabilities and accumulate capital. |
| Tax Advantages | Captives may offer significant tax advantages, contributing to improved company profitability. |
| Domicile | Captives are often domiciled "offshore" in jurisdictions like Bermuda, the Cayman Islands, and Vermont in the US. |
| Popularity | There are over 7,000 captives globally, with Bermuda being the largest single jurisdiction. |
| Types | Pure Captives, Sponsored Captives, Rental Captives, Protected Cell Captives, Micro Captives, and more. |
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What You'll Learn
Captive insurance companies are a form of self-insurance
Captive insurance companies are owned by their policyholders, with the policyholder usually also being the owner. This structure makes captives a formalized form of self-insurance. Captives can be set up in various ways, including as non-sponsored or sponsored captives. Non-sponsored captives are created and owned by a single company, while sponsored captives are owned by another company that allows other companies to "rent" insurance. Within these categories, there are further types of captives, such as pure captives, group captives, and association captives.
Pure captives are wholly owned, directly or indirectly, by their insureds, while sponsored captives are owned and controlled by parties unrelated to the insured. Group captives allow a group of insureds from different industries to own a captive jointly, and they may form a reinsurance pool to create underwriting capacity. Sponsored captives, also known as "non-owned" or "nonaffiliated" captives, have similar elements to pure captives but require the insureds to put their capital at risk and finance risks outside the commercial regulatory environment.
Captive insurance companies have been in existence for over 100 years, with the term "captive insurance" coined by Frederic Reiss in the 1950s. Today, there are over 7,000 captives globally, with Bermuda being the largest single jurisdiction for captives, followed by the Cayman Islands. Captives offer flexibility in managing risks and provide creative insurance solutions, but they must also comply with state regulatory requirements and be careful to avoid potential tax penalties.
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Captives are formed to meet unique risk-management needs
Captive insurance companies are formed to meet unique risk-management needs. They are a form of self-insurance, where the insurer is owned by the insured. Captives can be set up in various ways, but they typically provide their owners with more control over their risk management programs and increased flexibility in managing risk.
Captives are often established because insurance in the commercial market is prohibitively expensive, poorly matched to the insured's needs, or not available at all. Captive insurance companies can provide coverage for difficult or emerging risks that are tailored to the exact needs of the insured, as long as they operate within sound underwriting, actuarial, and regulatory guidelines. For example, captives can provide coverage for volatile, high-severity but low-frequency risks such as extreme weather events, cyber-attacks, or key product liability risks, which may be difficult to obtain insurance for in the traditional commercial marketplace.
Captives can also provide pricing stability and improve cash flow. As a captive matures and expands its risk retention capability, it can retain more risk and insulate itself from changes in the commercial insurance market. Captives can also provide financial incentives for loss control and safety, which can result in safer workplaces and more favourable loss experiences.
Additionally, captives can be used for corporate acquisitions, public companies that want to transfer risk, and companies that want to improve their balance sheets. They can also provide significant tax advantages, which can be integral to a company's longevity and profitability. However, it is important to carefully design and monitor captives to avoid potential tax penalties for unlawful tax evasion.
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Captives offer increased control over insurance-related services
Captive insurance companies are a form of self-insurance that came into existence due to difficult markets. They are an alternative form of risk management that gives companies greater flexibility in retaining risk and insurance/reinsurance options. Captives are typically established to meet the unique risk-management needs of their owners or members, with the policyholder usually being the owner. This gives the owners greater control over insurance-related services.
Captives also provide stability in the availability of coverage and pricing. As a captive matures and expands its risk retention capability, it can accumulate more capital, enabling it to better insulate itself from changes in the commercial insurance market. This results in pricing stability and a reduced impact of market fluctuations on the insured.
Additionally, captives can provide financial incentives for loss control and offer creative insurance solutions. They can also allocate costs to specific business units and consolidate risk management across different entities within a group. This increased control over insurance-related services allows captives to better meet the specific needs of their insureds.
It is important to note that captives are subject to state regulatory requirements, including financial reporting, capital and reserve requirements, and must have enough funds to pay claims and maintain a minimum surplus. While captives offer increased control, they must operate within these regulatory guidelines to ensure compliance and financial stability.
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Captives are regulated by local insurance authorities
Captive insurance is an alternative form of risk management that offers companies more control over how they are insured. Captive insurance companies are owned by the policyholder, meaning the insurer is captive to the policyholder. Captives can be set up in many ways, but they generally fall into two categories: non-sponsored and sponsored. Non-sponsored captives are created and benefited by a single company, while sponsored captives are owned by another company that allows other companies to "rent" insurance.
Captives are licensed by multiple jurisdictions, and their primary jurisdiction is known as its domicile. Most captive insurers are based "offshore" in places with favourable regulations, such as Bermuda, the Cayman Islands, and Luxembourg. These jurisdictions often have lower regulatory burdens and costs compared to onshore locations. Bermuda, for example, is favoured by large US corporations and healthcare corporations due to its regulatory environment that facilitates ease of claim payment.
The regulation of captives is the responsibility of local insurance authorities in their respective jurisdictions. These regulatory agencies require captives to maintain sufficient funds to pay claims and uphold a minimum surplus. Captives must comply with the regulations of their domicile, including any changes in the application of regulations. For instance, Anguilla experienced a decline in new formations due to the ever-changing regulatory landscape and the departure of respected regulators.
To ensure compliance with local regulations, captives may need to make significant capital investments. In some cases, alternative structures like Protected Cell Companies (PCCs) offer a more cost-effective approach to retaining risk without the same level of investment required by captives. Captives also need to consider the time and resources necessary to establish and operate within a specific jurisdiction.
Overall, captives are regulated by local insurance authorities, each with its own set of requirements and dynamics, influencing the feasibility and attractiveness of different domiciles for captives.
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Captive insurance companies can be domiciled in many jurisdictions
Captive insurance is an alternative to self-insurance where insured parties establish a licensed insurance company for their own use and benefit. Captives can be set up in many ways, but they can be broadly categorized into non-sponsored and sponsored insurance. In the former, the company is both the creator and beneficiary of the captive insurance, while in the latter, another company owns and controls the captive insurance and allows other companies to "rent" insurance.
Some of the leading captive insurance domiciles include Bermuda, the Cayman Islands, Luxembourg, and Vermont in the United States. Bermuda is the world's leading offshore captive domicile, attracting large US corporations due to its geographical location, clean reputation, and status as a British Dependent Territory. The Cayman Islands is the second-largest licensing jurisdiction in terms of the number of captives licensed. Luxembourg is the largest captive reinsurance domicile in the EU. Vermont is the largest domicile in the US and is considered a leader in captive legislation, although it has been criticized for its gross receipts tax on premiums and high fees for local professionals.
Other domiciles that have been gaining popularity include Anguilla, Delaware, Montana, Tennessee, and Utah. These domiciles offer the necessary oversight to ensure compliance while also providing flexibility for captive owners.
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Frequently asked questions
A captive insurance company is an insurance company that assumes risks from a policyholder and becomes responsible for paying out claims and other costs in accordance with the contract of insurance. In exchange, it receives a premium payment. What makes a captive insurance company unique is that its policyholder is usually also its owner.
Captives are formed to cover a wide range of risks and offer companies greater flexibility to retain risk and insurance/reinsurance options to manage a hard insurance market. Captives also offer increased control over insurance-related services such as safety and loss control, and claims administration.
Captives can be categorized into sponsored and non-sponsored captives. Sponsored captives are owned and controlled by another company that allows other companies to rent insurance. Non-sponsored captives are created and owned by the company that is insured. Within the non-sponsored category, there are pure captives, group captives, and association captives.
