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What is a
Captive?
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A captive
insurance
company is a
risk financing
entity that
serves a
corporation's
financial,
operational and
strategic goals
and objectives
A captive is a
structured
insurance
company licensed
under the laws
of a domicile,
many of whom
have specific
regulations
applying to
captives.
Generally a
captive does not
qualify as an
admitted insurer
in any US state.
A.M. Best
reports
that there were
3,861 captives
worldwide in
2000, with net
written premium
exceeding $50
billion, capital
and surplus of
more than $100
billion and
total invested
assets of more
than $225
billion. Premium
growth rates in
the captive
industry far
exceed those in
the commercial
insurance
industry and for
the 2003 year,
AM Best predicts
that the
alternative
market will
comprise nearly
50% of the US
commercial
market.
Captive
insurance
companies vary
according to:
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The number
of owners:
single
parent
versus
group.
-
Legal
structure:
captives
formed by
groups of
owners in
particular
can take a
number of
different
legal forms
including,
stock,
mutual
insurance
company, and
reciprocal
insurer
-
Source of
capital:
rent-a-captive
and
sponsored
captives
allow
insureds to
create a
captive
program
using a
third
party's risk
capital.
-
Scope of
risks
underwritten:
many
captives
have
expanded
their focus
from the
property and
casualty
risks of
their owners
to include
employee
benefits
and/or the
risks of
third
parties.
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What are
the Different Types of Captives?
Single Parent
Captive
A single parent
captive is owned and controlled by a single
organization and is formed as a subsidiary of
that organization. The captive insures that
organization and or other subsidiaries of that
parent, and, if desired, may also insure the
risks of third parties (for example: in the
areas of extended service contractor
warranties.)
Group Captives
Group
captives are owned
and controlled by a multiple of non-related
organizations, either as a homogeneous industry
or as a heterogeneous group captive. It is
formed as an independent captive and insures the
risks required of its owners and their industry
needs.
Association
Captives
An association
captive is owned by members of a common industry
or trade association and is designed to insure
the risks of that industry among its members.
Participation in the captive program is limited
to members of the association. Association
captives are a means to deliver value added
services to its membership.
Risk Retention
Groups
A risk retention
group is an entity licensed under the Federal
Liability Risk Retention Act. It is owned by its
insureds and is authorized to underwrite the
liability risks of its owners only. Owners must
be from a homogenous industry group. A risk
retention group is licensed as a captive
insurance company in its domicile of choice
within the US and may operate throughout the US
provided it properly registers with each state.
Reciprocal
Insurer
A reciprocal insurer
is an unincorporated association of subscribers
operating individually and collectively through
an attorney-in-fact to provide reciprocal
insurance among themselves. This type of captive
refers to the organizational structure. It is an
alternative to a stock or mutual form. Most
domiciles allow for group captives, association
captives or risk retention groups to be formed
as reciprocal insurers.
Rent-a-Captive
A rent-a-captive is
an insurance company that rents its capital and
services to insureds who wish to create a
captive program but do not want to invest in and
own an insurance company. The owners of
rent-a-captive facilities will usually require
collateral from insureds to protect the
aggregate participation in the captive program.
Sponsored
Captives, Segregated Cells and Protected cells
These entities are
all forms of rent-a-captives. Their
distinguishing feature is that the assets and
liabilities of one captive program (cell) are
legally separated from the assets and
liabilities of other captive programs.
Traditional rent-a-captive structures have no
such legal separation but require an
indemnification from their insureds for
liabilities from their captive programs. Most
major captive domiciles have passed regulations
creating the framework for the legal separation
of cells within the rent-a-captive. Different
terminology is used to refer to these new
entities in different domiciles: Bermuda
(segregated cell companies), Cayman Islands
(segregated portfolio companies), South Carolina
(protected cell companies) and Vermont
(sponsored captives).
Agency Captive
An agency captive is
owned by insurance agents and typically allows
the agency to share in the underwriting profits
and investment income of its book of business.
It also demonstrates to insurers and reinsurers
that the agent is committed to the profitable
underwriting of that business.
Branch Captive
A branch captive is an on-shore (US) arm of an
off-shore captive. Branch captives are
typically used to underwrite employee benefits
under ERISA.
These benefits can only be offered by a US
insurer.
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