XN

A captive insurance company is defined as a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners in which the original insureds are the principal beneficiaries and whose shareholder-insureds actively participate in decisions influencing underwriting, operations and investments.

Simply put, a captive is a mechanism that allows the parent company to reap the rewards of its own good loss experience by participating in underwriting profits and investment income while tailoring policies to the parent company’s specific needs. A well-designed captive corrects traditional insurance market shortcomings by allowing the owner to fill coverage voids and inefficiencies, minimize the cost of risk, and quickly adapt to market changes and business developments.

The last 25 years has seen phenomenal growth in the number of captive insurance companies worldwide. Today there are over 5,000 captives writing more than $20 billion in premium. The capital and surplus controlled by these companies is estimated at more than $50 billion.

The captive insurance industry has its origins in the formation of mutuals and co-insurance companies in the decades between the first and second world wars. The growth of the captive industry began to accelerate in the early 1950s, as parent companies moved to establish their captives offshore. Today, captives can be formed either domestically or internationally.

The primary catalyst in the development of captives has been the expense or even unavailability of certain types of insurance within the commercial market. The desire of companies to withdraw from the general pool of inferior risks and to control their own destiny has further contributed to the growth of the captive industry, so much so that even during periods of extraordinarily low commercial premium rates, interest in captives has remained strong.

There are many reasons for forming a captive insurance company or other alternative risk transfer (ART) vehicle including:

Reclaiming of control over risk financing through reduced reliance on commercial insurance
Reduction in the cost of risk management through the lowering of insurance acquisition expenses
Stabilization of pricing over time
Provision of coverage where otherwise unavailable or unaffordable
Access to reinsurance markets
Improved cash flow benefits
Reduction of government regulation and interference through proper choice of captive domicile
Ability to customize insurance programs
Formalize the allocation of deductibles for self-insurance retentions within a corporation
Better risk management through greater access to claims and underwriting data
Improved claims handling and control through implementation of tailored policies and procedures
Creation of a profit center
Potential tax advantaged treatment of accumulated underwriting and investment income
Ability to direct investment options