FREQUENTLY ASKED QUESTION
What are Captives?
Captive Insurance Companies are insurance companies that are established by a parent group or groups with the explicit objective of covering the risks to which the parent is unprotected. Therefore, the practice of such companies founds a sort of self-insurance, Captive insurance companies sometimes insure the risks of the group's clienteles.
This is an alternate method of risk management that is becoming a more every day and popular means through which companies can safeguard themselves monetarily while having more regulation over how they are insured.
The term "captive" was coined by the "father of captive insurance," Frederic M. Reiss, while he was bringing his concept into practice for his first client, the Youngstown Sheet & Tube Company, in Ohio in the 1950s. The company had a series of mining set-ups, and its management referred to the mines whose output was put solely to the corporation's use as captive mines.
When Reiss helped the company incorporate its own insurance subsidiaries, they were called captive insurance companies because they wrote insurance exclusively for the captive mines. Reiss continued to use the term: the policyholder owns the insurance company i.e. the insurer is captive to the policyholder. If the captive insures its own parent and affiliates, it is called a pure captive. If it insures just one type of industry (e.g. medical industries), it is called a homogeneous captive. A captive insurance company can also insure a group of diverse companies; this is called a heterogeneous captive. Some of this information was referenced from Wikipedia.
Why Form a Captive?
By forming a captive insurance company, a business can dramatically lower insurance costs in comparison to premiums paid to a conventional property and casualty insurance company. When establishing one’s own insurance vehicle, costs for overhead, marketing, agent commissions, publicity, etc., may result in noteworthy savings in the form of underwriting profits, which can be retained by the owner of the captive company.
Moreover, a captive insurance company can deliver security against risks which prove to be excessively costly in commercial markets or may be commonly unobtainable. The failure to obtain specialized types of coverage from commercial third-party underwriters is an added reason for clients to choose to create a captive insurance company. With a captive insurance company, a business owner can address their self-insured risks by paying premium payments to their captive insurance company.
To the extent the captive generates profits, those dollars belong to the owner of the captive.In most cases, to the extent existing Property & Casualty coverage is reasonably priced, business owners will continue to maintain existing policies for their traditional coverage and supplement existing coverage by addressing their self-insured risks with their own captive insurance company. Policy features, coverage and limits can be drafted to meet specific enterprise exposures.