A captive insurer (or “captive”) is a special-purpose insurance company formed primarily to underwrite the risks of its parent or affiliated groups. It is quite similar to a traditional, commercial insurance company in that it is licensed as an insurance company, it sets insurance-premium rates for the risks it chooses to underwrite, writes policies for the risks it insures, collects premiums and pays out claims made against those policies. The biggest difference between a captive insurer and a commercial insurance company is that a captive cannot sell insurance to the general public. It can only underwrite the risks of its parent organization or related entities. Another key difference is that the regulations governing captive insurance companies are typically less onerous than those regulations governing traditional commercial carriers.
At its most basic level a “pure” captive works like this: A corporation with one or more subsidiaries sets up a captive insurance company as a wholly owned subsidiary. The captive
is capitalized and domiciled in a jurisdiction with captive-enabling legislation which allows the captive to operate as a licensed insurer. The parent identifies the risks of its subsidiaries that it wants the captive to underwrite. The captive evaluates the risks, writes policies, sets premium levels and accepts premium payments. The subsidiaries then pay the captive tax-deductible premium payments and the captive, like any insurer, invests the premium payments for future claim payouts.
Like most innovations, captive insurance companies were created to solve a set of problems; in this case, risk-financing problems we didn’t know we had until we started thinking about managing and financing risk.
The content of this press release is from the book Taken Captive by R. Wesley Sierk III and available on Amazon.com.