A Comprehensive Captive Insurance Definition: A 2023 Guide

Introduction

Captive insurance has become increasingly popular as a risk management tool for businesses of all sizes. In 2021, the global captive insurance industry reached $150 billion in premiums written, and this number is expected to continue to grow in the coming years.

What is Captive Insurance?

A captive insurance company is a self-insured entity that provides coverage for the risks of its parent company or group of parent companies. Captives are typically formed in offshore jurisdictions that have favorable insurance regulations and tax laws.

Captives can be structured in a variety of ways, but they all share some common characteristics:

• They are owned and controlled by the policyholders
• They are regulated by insurance regulators
• They provide coverage for a specific set of risks
• They are often used to supplement or replace traditional insurance policies

Types of Captive Insurance Companies

There are two main types of captive insurance companies:

• Single-parent captives are owned and controlled by a single parent company.
• Group captives are owned and controlled by a group of parent companies.

Single-parent captives are the most common type of captive. They are typically used by large companies that have a significant amount of risk to insure. Group captives are less common, but they can be beneficial for companies that have similar risks and want to pool their resources to reduce costs.

Benefits of Captive Insurance

There are a number of benefits to forming a captive insurance company, including:

• Cost savings: Captives can often provide coverage for less than the cost of traditional insurance policies. This is because captives are not subject to the same profit margins as commercial insurers.
• Flexibility: Captives can be customized to meet the specific needs of the policyholders. This includes the types of coverage provided, the limits of liability, and the deductibles.
• Control: Captives are owned and controlled by the policyholders. This gives the policyholders more control over the coverage they receive and the costs of the coverage.
• Access to capital: Captives can provide a source of capital for the parent company or group of parent companies. This can be especially beneficial for companies that are unable to obtain traditional financing.

Challenges of Captive Insurance

There are also some challenges associated with forming a captive insurance company, including:

• Regulatory compliance: Captives are subject to regulation by insurance regulators. This can be a complex and time-consuming process.
• Tax implications: Captives can have complex tax implications. It is important to consult with a tax advisor before forming a captive.
• Financial Stability: Captives are responsible for paying claims to policyholders. This means that captives must have sufficient financial resources to cover potential losses.
• Capacity: Captives can only provide coverage for a limited amount of risk. This is because captives are not subject to the same risk-spreading mechanisms as commercial insurers.

Is Captive Insurance Right for You?

Captive insurance can be a valuable risk management tool for businesses of all sizes. However, it is important to carefully consider the benefits and challenges of captive insurance before making a decision.

Here are some factors to consider:

• The size of your business
• The amount of risk you have to insure
• Your financial resources
• Your regulatory compliance obligations
• Your tax implications

If you are considering forming a captive insurance company, it is important to consult with a qualified professional.

Conclusion

Captive insurance can be a complex but rewarding risk management tool. By carefully considering the benefits and challenges of captive insurance, you can make an informed decision about whether or not captive insurance is right for your business.

Additional Information

Resources

• Captive Insurance Companies Association
• International Association of Insurance Supervisors
• National Association of Insurance Commissioners

Glossary

• Captive insurance company: A self-insured entity that provides coverage for the risks of its parent company or group of parent companies.
• Parent company: A company that owns and controls a captive insurance company.
• Policyholder: A company or individual that is insured by a captive insurance company.
• Risk: The possibility of loss or damage.

Tables

Table 1: Global Captive Insurance Premiums Written

Table 2: Types of Captive Insurance Companies

Table 3: Benefits of Captive Insurance

Table 4: Challenges of Captive Insurance