A Growing Global Industry
Captives insurance companies are formalized self-insurance.
The benefits of forming your own captive are rather compelling over self-insuring and buying retail insurance. Risk and insurance benefits are layered on top of business and tax advantages.
A captive is created by forming a new company that applies for an insurance license from a US state or foreign country (known as captive domiciles) that has statutory authority to license and regulate captive insurance companies. Click here to learn the formation steps and costs involved.
Captives differ from traditional insurance companies because captives do not insure the general public; they are designed to only insure customized risks of affiliated businesses and the captive owners. Used correctly they can reduce the cost of insurance purchased through commercial insurance companies.
Captives allows a business to custom design its insurance coverages, internalize profits being made by commercial insurance companies, and access the wholesale market for insurance referred to in the industry as reinsurance.
While tax advantages often help justify creation of a captive, an increasing number of tax-exempt non-profits and even government entities create captives today proving that the business and non-tax economic benefits of well designed captives are very compelling for any organization serious about improving its enterprise risk management program.
Captives can even be designed to offer certain insurance to existing customers, thereby creating a profit center captive. Auto dealerships have long done this by offering car buyers extended warranty coverage through dealership owned captives. Best Buy does this with electronic product extended warranties offered when you buy product from them. We are helping real estate investment companies design captives to offer insurance to tenants. We even consulted with a university about using captives to offer insurance to students, alumni organizations and others holding events on university property or off campus for university affiliated events. The potential uses of a captive are only limited by your creativity and skill.
The world’s largest companies have long used captive insurance companies as strategic risk management and asset protection vehicles. Creating a captive is often the 1st step in a formal enterprise risk management program. Learn the history of captive insurance, originally an exclusively offshore industry for larger companies, by clicking here.
Captive insurance companies are a mature risk transfer and finance vehicle. Captives are best known as formalized self-insurance covering the risks of its owner and affiliated businesses. Increasingly, captive owners are trying to find “niches” in areas they have particular expertise to extend captive insurance company use and create profit centers by extending coverage to 3rd parties not owners or affiliates. Captives are increasingly integrated into successful family business wealth protection and transfer programs.
While every captive insurance company is unique and customized, there are several main legal types in common use.
Captives are a significant part of the insurance industry landscape today and routinely do business with large traditional insurance companies.
Captive insurance companies have emerged to:
• compete with traditional insurance companies for sophisticated and valued customers – those with significant insurance expenses yet better than average claim and loss experiences
• address risk exposure management where commercial insurance is unavailable or simply too expensive
• See, “History of Captives” for more detail.
Captive insurance companies are part of the world known as “Alternative Risk Transfer (ART), also known as Alternative Risk Finance.” Traditional Risk Transfer (TRT) programs and products are provided by commercial insurers. The ART industry is a response to TRT programs that, either for regulatory or business reasons, do not respond quickly and efficiently to the ever changing risk environment of commercial and nonprofit enterprises./1
Captives are government authorized and regulated insurance companies formed to create and sell customized insurance policies and programs to affiliated or related parties to meet their needs in the most cost effective manner.
Widely Used Captive Definitions
Here are some widely referenced helpful definitions:
A.M. Best’s Captive Directory uses this definition when deciding which insurance companies should be included in the “captive” section of its insurance rating directory:
“A captive is an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners; the primary beneficiaries of its underwriting profits are its insureds.”
Wikipedia defines captives as:
“Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group’s customers as well. Using a captive insurer is a risk management technique by which a business forms its own insurance company subsidiary to finance its retained losses in a formal structure.”
An industry training book by Dwight Levick, Risk Management and Insurance Audit Technique, says a captive is:
” … a limited purpose subsidiary of an organization not in the insurance business, which has as its primary function the insuring of some of the exposures and risks of its parent or its parent’s affiliates.”
• Click here to learn why a captive insurance company may be an attractive alternative risk finance vehicle for you
1/ Captives and the Management of Risk, International Risk Management Institute, 2006.