Understanding Insurance: What Is a Captive Insurance Company?

There are over 7,000 captive insurers around the world, with over 70 jurisdictions using capital legislation.

This increasingly popular alternative option is still not well-known. Many people may wonder exactly what is a captive insurance company.

Read our guide to understand what captive insurance companies are, how they work, and how to create one effectively.

What Is a Captive Insurance Company?

Part of knowing what a captive insurance company is, involves understanding how it differs from more traditional methods.

Traditional insurance involves the exchange of underwriting information to another company. They become contractually obligated to pay some of your company’s losses. Captive insurance is a type of alternative risk finance, as it goes outside of the traditional methods.

A captive insurance company is a subsidiary of a private company monitored by a state insurance department. It’s formed to finance losses, manage risk, and/or supplement already existing commercial insurance.

Captive insurance is a form of self-insurance because the insurer completely owns the company it insures.

The primary jurisdiction of a captive insurance provider is called a domicile. This is the place they run their business out of.

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Types of Captive Insurance

Determining what an individual insurance captive is, depends on knowing what type it’s formed as. It’s important to know the differences between these types to understand which is best for your business.

The most common type of captive insurance company is a single parent or pure captive, where only the parent company’s risk is insured.

Variations exist like rent-a-captive, risk association groups, agency captives, and branch captives. New ones are created often by creative companies to manage risk in different ways.

How to Make A Captive Insurance Company

It’s also important to know how captive insurance companies work and what it takes to create one. It’s a multi-step process with each part just as important as the other.

The first step is to choose the best type of captive insurance company for your needs, whether it be a single parent setup or one of the numerous variations such as an agency or branch captive.

The next important step is performing a feasibility study. This shows whether the captive you hope to create will meet your risk management goals, and some regulators require it before applying.

The next step is to choose partners. One important asset is a knowledgeable captive manager. Other important partners to consider are consultants, risk-sharers, attorneys, accountants, and actuaries.

The final and potentially most crucial decision is to choose a primary domicile. This is the main place the captive will work out of, so it must be chosen carefully.

Once all these steps are taken care of, submit an application to your preferred captive manager.

Benefits

There are various reasons to form and/or work with a captive insurance company. They provide benefits that traditional insurance can’t match.

Advantages of a captive insurance company including improved cash flow and tax-exempt payments. They can also provide types of insurance not available from traditional insurers such as terrorism and credit risk.

Learn More

Knowing what a captive insurance company is, how to create it, and the benefits it provides is a useful asset. It helps you decide if this high-risk but high-reward option is best for your business.

Read our other content and keep checking back for more information.


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