What is a Captive?

The captive insurance industry is an ever-changing and dynamic one and companies continue to innovate, finding more creative ways of supporting business objectives and the needs of their stakeholders.

What is a captive?

A captive is a wholly owned subsidiary of a company, whose primary function is to insure some or all of the risks of its parent or stakeholders, essentially providing the company with the ability to self-insure. The captive insurance industry is an ever-changing and dynamic one and companies continue to innovate, finding more creative ways of supporting business objectives and the needs of their stakeholders.

A captive is generally owned through a common interest, either as a single-parent shareholder or a group of shareholders.

Companies use captives largely when commercial insurance is more expensive or the coverage required is simply not available. A significant portion of the risks written are related in some way to the risks of shareholders, or third-party risks which the shareholders control. In this respect a captive is an insurer that writes risks whose origins are restricted, or those risks to which it has unique access.

Typical coverage includes

  • Primary policy - coverage provided directly to the parent or stakeholders
  • Fronted policy - coverage provided through the traditional insurance market covering risks of the stakeholder group
  • Excess coverage - coverage provided by the captive and then reinsured to the traditional reinsurance market
  • An umbrella or stop-loss policy - coverage acquired by the captive in the traditional reinsurance market

Types of captives

  • Single Parent Captive – This is an insurance or reinsurance company that only insures it’s parent of affiliated companies
  • Group Captive – an insurance company that insures or reinsures the risks of of either a homogeneous or heterogeneous group of companies who may, or may not, be owners of the company
  • Association Captive – a company owned by a trade association and used to meet the insurance needs of its members
  • Agency Captive – a company owned by an insurance agency which utilises it to take risk on some of the business they place in the insurance market
  • An umbrella or stop-loss policy - coverage acquired by the captive in the traditional reinsurance market
  • Segregated Portfolio Company (“SPC”) – a company which is set up with a “core”, which usually doesn’t take risk and various segregated cells which do take on particular risks. The assets and liabilities of each cell are segregated from each other. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participating agreement. This is a usefully vehicle for those programs not large enough to set up their own captive or who do not wish to manage their own captive.
  • Risk Retention Group (“RRG”) - a type of captive available in U.S. domiciles which is an insurance company (RRG) licenced under the Federal Risk Retention Act of 1981, as amended in 1986, which allows an insurance company licenced in one state to write business in all states without going through the full filing requirements to get licenced there. An RRG is owned by it’s insureds and can only write liability business

Cayman Captive Forum

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