Jeffrey Wade
Captive insurance companies are a form of risk management that is becoming an increasingly popular way for companies to protect themselves financially while having more control over how they are insured. A captive insurer is defined as an insurance company that is wholly owned and controlled by its insureds, with the primary purpose of insuring the risks of its owners. This means that insureds in a captive choose to put their own capital at risk by working outside of the traditionally regulated commercial insurance marketplace. 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.
| Characteristics | Values |
|---|---|
| Definition | An insurance company that is wholly owned and controlled by its insureds |
| Insured's role | Put their own capital at risk, work outside the commercial insurance marketplace, invest their own resources |
| Benefits | Ability to tailor coverage, apply alternative strategies, provide financial incentives for loss control, offer flexibility in managing risk, offer creative insurance solutions, allocate costs to business units, consolidate risk management, achieve pricing stability, improve cash flow |
| Risks | Less capital than commercial insurers, no protection for the insureds from state guaranty funds, IRS scrutiny of "line-item homogeneity" |
| Formation | Established due to difficult markets, commercial insurance being expensive, poorly matched, or unavailable |
| Location | Most are based "offshore" in places like Bermuda, Singapore, Luxembourg, etc. In the US, Vermont has the most captive insurers |
| Regulatory requirements | Subject to state regulatory requirements, potentially less onerous than commercial market ones. Requirements include financial reporting, capital/solvency support, reserve adequacy, and an annual actuarial opinion |
| Taxation | Premiums paid to captives are tax-deductible, provided the terms of the policy are reasonable |
Explore related products
What You'll Learn
Captive insurers are owned and controlled by the insured
A "captive insurer" is an insurance company that is wholly owned and controlled by its insureds. The insureds in a captive insurance company have ownership of and control over the company and benefit from its profitability. Captive insurance is utilised by insureds who choose to put their own capital at risk by creating their own insurance company, working outside of the commercial insurance marketplace.
Captive insurance is an alternative form of risk management that offers companies greater flexibility to retain risk and insurance/reinsurance options to manage a challenging insurance market. Captives can be utilised to insure a wide range of risks depending on business needs, including first-party or third-party risks. Captives can also offer creative insurance solutions and flexibility in managing risk.
Captive insurance companies came into existence because of difficult markets, such as when insurance in the commercial market is prohibitively expensive, poorly matched to the insured's needs, or not available at all. Captives can successfully provide coverage for difficult risks that are tailored to fit the exact needs of the insured as long as they operate within sound underwriting, actuarial, and regulatory guidelines.
Most captive insurers are based "offshore" in jurisdictions that allow the captive concept to flourish, such as Bermuda, which was chosen by Frederic M. Reiss, the "father of captive insurance", due to its geographical location, clean reputation, and status as a British Dependent Territory.
Money Market and CD Accounts: Are They Insured?
You may want to see also
Explore related products
Captives are a form of alternative risk management
Captives are formed to tailor coverage for hard-to-insure or emerging risks, providing financial incentives for loss control and flexibility in managing risk. They can be used to insure a wide range of risks depending on business needs, including general liability, auto, casualty, property, and workers' compensation losses. They can also cover more unique risks such as management liability, environmental liability, terrorism, cyber, and professional liability.
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. Captives can provide coverage for difficult risks that are tailored to fit the exact needs of the insured, as long as they operate within sound underwriting, actuarial, and regulatory guidelines. Captives can also provide stability in the availability of coverage and improve cash flow.
There are many variations of how captives can be set up, but they can generally be broken into two categories: non-sponsored and sponsored. In the non-sponsored category, the company is the creator and beneficiary, and the most common types are single-parent or "pure", group, and association. In the sponsored category, the captive is owned and controlled by another company that allows other companies to "rent" insurance, including protected cell captive insurers and rental captives.
How Insurance Certificate Holders Get Depreciation Money
You may want to see also
Explore related products
Captives are often based offshore
Captive insurance companies are often based offshore in locations such as Gibraltar, Mauritius, Belize, Bermuda, the Cayman Islands, Ireland, Guernsey, Luxembourg, Barbados, Malta, the Bahamas, Singapore, Anguilla, the British Virgin Islands, Qatar Financial Centre, and Dubai International Financial Centre. Bermuda is the world's leading offshore captive domicile, largely due to its geographical location, clean reputation, and status as a British Dependent Territory, which avoids the risks and uncertainties often experienced by international businesses operating in politically unstable and unaccountable jurisdictions.
The decision to establish captives offshore is influenced by several factors. One key factor is the regulatory environment, which can be more favourable in offshore jurisdictions. Captive insurers are subject to state regulatory requirements, but these may be less onerous than the regulations imposed on commercial insurers. By operating offshore, captives can benefit from simplified regulations and potentially reduce their compliance burden.
Additionally, captives are often established in response to challenges in the commercial insurance market. Commercial insurance may be prohibitively expensive, poorly matched to the unique needs of certain businesses, or simply unavailable for certain types of risks. By establishing captives offshore, businesses can gain greater flexibility in managing their risks and designing insurance programmes that are tailored to their specific needs.
Offshore captives also offer benefits in terms of risk distribution. Captives can participate in "risk pools", where multiple captive owners share certain risks through their individual captives. This allows businesses to diversify their risk exposure and improve their risk management capabilities, particularly for organisations that may not have enough subsidiaries to pass the "multiple insured" test for risk distribution.
Furthermore, captives based offshore can provide stability in the availability of coverage and achieve pricing stability over time. As the captive matures and expands its risk retention capabilities, it becomes more insulated from fluctuations in the commercial insurance market. The accumulation of capital within the captive enhances its ability to retain risks and maintain stable pricing for the insured entities.
**Insurance Adjuster's Response: Understanding the Timeline After Your Demand Letter**
You may want to see also
Explore related products
Captives can be established due to expensive commercial insurance
Captive insurance companies are established when commercial insurance is too expensive, poorly matched to the insured's needs, or unavailable. Captives are owned and controlled by their insureds, and their primary purpose is to insure the risks of their owners. Insureds in a captive put their own capital at risk by working outside the traditionally regulated commercial insurance marketplace. They do so believing that captive insurance offers something superior to commercial insurance.
Captives can provide coverage for difficult risks that are tailored to fit the exact needs of the insured. They achieve pricing stability over time as they mature and expand their own risk retention capability. The more capital that is accumulated, the greater the captive insurer's ability to retain risk and insulate itself from changes in the commercial insurance market.
Captives are considered part of the "alternative market" or "alternative risk transfer (ART) market" because they are not traditional commercial insurers. They are often based offshore in places like Bermuda, Luxembourg, and Singapore, where Bermuda is the leading offshore captive domicile. Captives are subject to state regulatory requirements, which may be less onerous than those for commercial insurers.
Captives offer companies greater flexibility in managing risk and insurance/reinsurance options. They can also provide financial incentives for loss control, offer creative insurance solutions, and allocate costs to business units. However, captives often have significantly less capital than commercial insurers and no protection for the insureds from state guaranty funds.
Understanding Insurance Reimbursements: Risk Adjustment Payment Models
You may want to see also
Explore related products
Captives can offer tailored coverage for hard-to-insure risks
Captive insurance is an alternative form of risk management that gives companies more control over how they are insured. It is a licensed insurance company that insures risks depending on business needs. A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insureds, with its primary purpose being to insure the risks of its owners.
Many captives are established because insurance in the commercial market is often prohibitively expensive, poorly matched to the insured's needs, or simply unavailable. Captives can offer tailored coverage for hard-to-insure risks, providing stability in the availability of coverage. Captives can successfully provide coverage for difficult risks, as long as they operate within sound underwriting, actuarial, and regulatory guidelines.
Pricing stability is achieved over time as a captive matures and expands its own risk retention capability. The more capital that is accumulated, the greater the captive insurer's ability to retain risk and insulate itself from changes in the commercial insurance market. Captives can also provide stability in the availability of coverage and improve cash flow through losses retained, which reduce or eliminate underwriting profits.
Captives can be particularly useful for businesses with unique or hard-to-insure risks, such as environmental liability, management liability, terrorism, cyber liability, and extended warranty claims. They allow businesses to be creative in how they utilize their captive programs and offer flexibility in managing risk. For example, British Petroleum set up a captive insurance company (Jupiter Insurance Ltd.) to provide environmental insurance to its operating units, with the funds being used to substantially fund the Gulf cleanup.
It is important to note that captives often have significantly less capital than commercial insurers and no protection for the insureds from state guaranty funds. Those who choose captive insurance accept the risks and rewards associated with using their own risk capital.
Elephant Insurance: Commercial Coverage for Your Business?
You may want to see also
Frequently asked questions
A captive insurer is an insurance company that is owned and controlled by its insureds. Its primary function is to insure the risks of its owners, who benefit from the captive insurer's underwriting profits.
Captive insurers offer greater flexibility to retain risk and insurance/reinsurance options. They can also provide stability in the availability of coverage and improve risk management, lower costs, and increase efficiency.
Captive insurers often have significantly less capital than commercial insurers and no protection for the insureds from state guaranty funds. They may also struggle to adequately assess and distribute risk.
Jupiter Insurance Ltd. is a captive insurer set up by British Petroleum to provide environmental insurance to its operating units. Bermuda is the world's leading offshore captive domicile, with many captives predominantly owned by large US corporations.
