FREQUENTLY ASKED QUESTIONS
WHAT ARE CAPTIVES?
Captive insurance companies are insurance companies that are established by a parent group or groups to cover the risks for which the parent is unprotected. Captives are a form of self-insurance. Captive insurance companies sometimes insure the risks of the group's clientele.
Captive insurance companies are an alternate method of risk management that is growing in popularity and use. It enables companies to safeguard their finances and have more control over how they are insured.
The term “captive” was coined by the Frederic M. Reiss, known as the father of captive insurance, while he was putting his concept into practice for his first client, the Youngstown Sheet & Tube Company, in Ohio in the 1950s. Youngstown Sheet & Tube operated a series of mines for its sole use. Management referred to these mines 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.
In a captive insurance company, the policyholder owns the insurance company. This means 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), it is called a homogeneous captive. A captive insurance company can also insure a group of diverse companies. This is called a heterogeneous captive. Wikipedia provided some of this background.
WHY FORM A CAPTIVE?
By forming a captive insurance company, a business can dramatically lower insurance costs compared to a conventional property and casualty insurance company premiums. Establishing one’s own insurance vehicle may result in savings on overhead, marketing, agent commissions, publicity, etc. Underwriting profits can be retained by the owner of the captive company.
Moreover, a captive insurance company can deliver security against risks that prove to be excessively costly in commercial markets or may be commonly uninsurable. The failure to obtain specialized types of coverage from commercial third-party underwriters is an added reason for businesses to choose to create a captive insurance company. With a captive insurance, company, companies 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 and casualty coverage is reasonably priced, business owners will continue to maintain existing policies for their traditional coverage, and supplement existing coverage with their own captive insurance to take on their self-insured risks. Policy features, coverage and limits can be drafted to meet specific enterprise exposures.