Captive Insurance Carrier Basics

A captive insurance company is a wholly-owned subsidiary insurer formed to provide risk mitigation services for its parent company or related entities. It is a form of corporate self-insurance, where the parent company creates a subsidiary insurer to provide insurance coverage for itself. Captives are typically established to meet the unique risk-management needs of the parent company, which may not be adequately covered by traditional commercial insurance. By creating a captive insurance company, the parent company can also benefit from lower insurance costs, tax advantages, underwriting profits, and greater control over coverage and claims.

Captive insurance companies are a form of self-insurance

Captives are formed when a parent company cannot find a suitable outside firm to insure it against particular business risks. They are also created to provide tax savings, more affordable insurance, and better coverage for the parent company's specific risks.

Captive insurance companies have been in existence for over 100 years, with the term "captive insurance" first coined by Frederic Reiss in the 1950s. Today, there are over 7,000 captives globally, and approximately 90% of Fortune 500 companies have captive subsidiaries.

Captives can be set up in various ways, but they generally fall into two categories: non-sponsored and sponsored. In the non-sponsored category, the company is the creator and beneficiary, with the most common type being a single-parent or "pure" captive. The sponsored category involves captives owned and controlled by another company that allows other companies to "rent" insurance.

While captive insurance companies offer many benefits, such as lower insurance costs, tax advantages, and greater control over coverage, there are also some drawbacks to consider. These include overhead expenses, compliance issues, and the potential to be underinsured.

Overall, captive insurance companies provide a way for companies to manage their unique risks and control costs while reaping the benefits of tax advantages.

They are wholly-owned subsidiary insurers

Captive insurance is a form of self-insurance in which a parent company wholly owns a subsidiary insurer formed to provide risk mitigation services solely for that company and its related entities. In other words, the insurer is owned entirely by the insured. Captives are typically established to meet the unique risk-management needs of the parent company, which acts as both the creator and beneficiary of the captive.

Captive insurance companies are usually formed when a parent company cannot find suitable or affordable outside coverage for specific business risks, or when the insurance provided by a captive is more affordable. Captives also create tax advantages, as the parent company can pay premiums to its captive insurance company and seek to deduct these premiums in its home country. In the United States, the Internal Revenue Service (IRS) requires risk distribution and risk shifting to be present for a transaction to fall into the category of insurance.

There are many variations of how captives can be set up, which can be broken into two categories: non-sponsored and sponsored. In the non-sponsored category, the most common types are single-parent or “pure”, group, and association captives. In the second, sponsored category, the captive is owned and controlled by another company that allows other companies to “rent” insurance. This category includes Protected Cell Captive Insurers and Rental Captives.

Captive insurance companies have been in existence for over 100 years, with the term "captive insurance" coined by Frederic Reiss in 1955. Captives can be domiciled and licensed in a wide number of jurisdictions, both in the U.S. and offshore. The captive's primary jurisdiction is known as its “domicile”. Today, there are over 7,000 captives globally, with Bermuda being the largest single jurisdiction, followed by the Cayman Islands.

They provide risk mitigation services for parent companies

Captive insurance companies are a form of corporate self-insurance. They are wholly owned subsidiary insurers formed to provide risk mitigation services for their parent company or related entities. In other words, they are insurance companies set up by their parent company to insure against risks specific to that company.

Risk mitigation services are strategic measures to manage, reduce, or eliminate potential threats to individuals, businesses, and organizations. They involve identifying and evaluating potential dangers, vulnerabilities, or risks, and then creating a plan to counteract them. The goal is to minimize the damage these threats can cause if they become a reality.

Captive insurance companies can be helpful when the commercial insurance market is unable or unwilling to provide coverage for certain risks. For example, a company may form a captive if it cannot find a suitable outside firm to insure it against particular business risks. Captives can also be used to insure against risks that are too unpredictable for traditional insurers, such as natural and political disasters and major macroeconomic shifts.

By creating a captive insurance company, a parent company can gain greater control over coverage and claims decisions, as well as potentially lower costs and significant tax advantages. Captives can also provide underwriting profits and direct access to reinsurance markets.

However, there are also drawbacks to captive insurance companies. They can result in additional overhead expenses, compliance issues, and the potential to be underinsured. Setting up a captive can be challenging, and corporations often rely on traditional insurers to insure against some risks.

Captives can be domiciled in the US or offshore

One key consideration is the receptiveness of the regulatory environment. The domicile regulations should be acceptable not only to the parent company but also to the insurers, reinsurers, and the government in the parent company's domicile. Offshore captives usually allow lower minimum capital requirements and may not require regulatory examinations. Some jurisdictions have developed an environment that is particularly supportive of certain types of captive. For example, Bermuda was the first domicile to establish cell captives and the Cayman Islands is a major hub for international insurance business.

Another important factor is the fiscal framework and tax planning. There are US tax effects and consequences to being onshore and offshore, and these should be carefully considered. When domiciling a captive offshore, the US entity may have to pay federal excise tax on the premium, which can be a significant added cost. On the other hand, if the captive is domiciled in a different state than the parent company, there may be a self-procurement tax payable to the home state. Taxes on income are typically negligible for offshore captives.

The convenience of a local domicile is also a factor. Domiciling a captive closer to home can provide easier access to meetings and lower costs for audit, legal, travel, and management fees.

Other considerations include the quality of the local infrastructure, the availability of expertise, the stability of the regulatory environment, and the ease of doing business.

Ultimately, the decision of whether to domicile a captive onshore or offshore depends on the specific needs and strategic plans of the company.

There are two main types of captive insurance companies: pure captives and group captives

Captive insurance companies are a form of corporate self-insurance. They are wholly owned subsidiary insurers that provide risk mitigation services for their parent company or related entities. They are typically established to meet the unique risk-management needs of the owners or members.

Pure captives are 100% owned, directly or indirectly, by their insureds. They are called "pure" because they insure only the risks of their owner or owners. Single-parent captives have only one owner, while group captives have multiple owners. Pure captives can also be referred to as special purpose captives.

Group captives are owned and controlled by two or more non-affiliated organisations insured by the captive. They are formed by a group of individuals or entities that come together to jointly own a captive insurance company. This type of captive typically insures only insureds in the same industry group or with homogeneous risk, creating group buying power and other risk management efficiencies.

The variety of captive insurance companies provides options for each company's needs and strategic plans. This diversity allows companies to be creative and adaptive in their short- and long-term risk management planning.

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