Captive insurance makes sense for many companies that face unique risks in their daily operations. Captives help to drive down costs, improve insurance coverage, and form the foundation of a comprehensive risk management program. There are many benefits to this insurance solution, and they work for many organizations. To further bring down administrative costs and to create underwriting and investment income, however, another solution represents a step forward. This is the concept of the “Rent-a-Captive”, offering all the benefits of an owned captive insurer without many of the hassles and limitations associated with a captive insurance program. In this guide, we’ll explore Rent-a-Captives, including how this insurance solution can provide significant benefits for companies.
What is a Rent-a-Captive?
Many business owners may be unfamiliar with the concept behind a Rent-a-Captive insurance solution. It can be useful to understand the organization and components of this alternative risk financing method. In simple terms, a Rent-a-Captive, often referred to as a rental captive, is a captive insurance company where unrelated insureds can use or “rent” its services without being an owning or managing member of the captive company. This insurance model allows the sharing of risk between participants, or can specify no risk sharing at all, making participation in the rental facility very similar to obtaining insurance from a commercial provider. There are many ways a rental captive can be formed, and are commonly established by large insurance companies or brokers as well as smaller firms or even an independent captive insurance program, all with the goal of renting its insurance services to others.
Perhaps the most common rental captive arrangement is that of the segregated or protected cell model. In this model, sometimes known as a Protected Cell Company (PCC) or cell captive, the assets and liabilities of each insured using the rental facility are legally segregated. In other words, while all of the contracts are joined through participation in the rental, the facility will separate each client’s premiums, losses, and investment income, protecting the overall facility from excessive losses incurred by one or more of its participants. The assets held in each participant’s cell may not be used to pay claims and liabilities for other participants. A renter doesn’t just occupy space in the rental arrangement, but gains important benefits through this insurance solution.
Benefits of Rent-a-Captive Insurers
As an alternative risk financing method, rental captives provide significant benefits to their participants. This is especially true for companies that have hard-to-place risks and where traditional insurance solutions may be prohibitively expensive or non-available. Some of the many benefits and advantages of rental captives include:
- Each participant in a rental captive gains the potential for underwriting profit and investment income.
- Administrative and management costs are typically far less than in an owned captive insurance model.
- Participants are not required to commit funds for capitalization.
- Incredible flexibility, providing insurance protection for myriad unique risks in ways that other insurance programs cannot.
- The reduction or elimination of legal problems and concerns related to the administration of a captive, especially in terms of single participants having excessive liabilities in any given year.
- Fewer restrictions on exit, such as when a participant seeks to develop its own insurance program or to purchase insurance on the traditional market.
Rent-a-Captive insurance programs are not new, but over the past decade have gained prominence. Today, these unique risk financing methods provide substantial benefits, allowing participants to gain valuable insurance protection without many of the expenses and challenges they might have in an owned-captive or commercial insurance scenario.
About Caitlin Morgan Captive Services
Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.