Posted by A captive insurance company is a wholly-owned subsidiary insurer that is formed to provide risk management solutions for its parent company or related entities. As Charles Spinelli says, the potential benefits of a captive insurance company are many, including greater control over coverage, lower insurance costs, tax advantages and underwriting profits. Captive insurance companies can be particularly helpful when the commercial insurance market is unwilling or unable to provide coverage for particular risks. A large number of Fortune 500 companies today tend to have captive insurance companies.
Charles Spinelli offers an overview of captive insurance companies
Captive insurance companies are subsidiaries that are established to provide insurance to their non-insurance-based parent organization. These groups are typically owned wholly by a parent company and provide a form of self-insurance to the organization. Instead of buying insurance through a carrier, companies often form captives in order to take on their own risk management and underwriting functions.
Captive insurance is not a one-size-fits-all solution. Companies ideally explore multiple types of captive models and select the one that aligns with their specific structure and needs. Here are some of the most common captive classifications:
- Pure captive: Also referred to as single-parent, pure captives are wholly owned by the single company that they insure. They are a common choice for large companies that require coverage for multiple types of and unique risks.
- Group captive: This form of insurance is made up of multiple businesses that join together in order to obtain coverage beyond what is available through traditional carriers. Group captives are generally pretty popular among small and mid-size companies, and generally come in multiple forms.
- Rental captive: Rental captives enable companies to enjoy the benefits of captive insurance without having to deal with the expenses linked with forming and managing one on their own. Under this arrangement, a captive insurer generally “rents” its services to an outside organization in return for a fee.
- Association captive: This type of captive is much like a group captive in the manner that it is owned by a number of companies. But instead of being just in the same industry, the companies are also all members of the same association.
As Charles Spinelli mentions, steady growth has been seen in the domain of captive insurance since it was introduced. Forming a captive offers companies with a number of benefits. It provides companies with the ability to effectively tailor their insurance coverage to fit their distinctive needs. Traditional insurance, on the other hand, is designed for the “average” individual or company and therefore would be more generalized.
There are many companies that require their risk management coverage to include certain hard-to-insure or emerging risks, such as environmental or cyber liability. Traditional insurance for these risks might be priced too high or even be unavailable. Choosing to form a captive provides companies with the freedom to dictate their own coverage and make sure that it is well suited to their specific needs.
There are cost-saving advantages associated with forming a captive as well. Traditional insurance companies incorporate profit into the cost of their premiums. However, in the case of captive insurance, a company avoids any additional costs built into their rates. They are unlikely to include administrative and marketing costs, which are commonly included in traditional premiums.