Captive Insurance Options to Meet Your Specific Needs
A captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners). They are typically established to meet the risk management needs of the owners or members, and can cover a wide range of risks. The type of entity forming a captive ranges from a major multi-national corporation to a non-profit organization. Once a captive is formed, it operates like any commercial insurance company and is subject to state regulatory requirements including reporting, capital and reserve requirements.
Why Form/Join a Captive?
The principal reasons for forming or joining a captive are:
- Provides price stability and the potential to reduce the cost of risk funding
- Ability to obtain broader and customized coverage including for unique or specific risks that may not be available in the commercial market
- Greater control over claims management and loss control
- Direct access to the reinsurance market along with greater capacity
- Improves cash-flow timing and investment returns
- May provide a more efficient tax structure
Types of Captives
There are a variety of types of captives to meet the insurance and risk management needs of organizations, including:
Single Parent Captives (Pure)
The most common type of captive and typically used for larger entities, a Single Parent Captive (SPC) or Pure Captive, insures the risks of related companies and is owned and controlled by the related company or its affiliates. A Single Parent Captive is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries. The parent of the captive insurance company provides the capital in forming the captive, and has direct involvement and control over the captive’s major operations including underwriting, claims and investments. The SPC can choose its retention level, reinsurer, aggregate stop limit, service providers, and may write any line of business, including coverage and limits that aren’t available throughout the insurance marketplace, such as credit risk and terrorism.
A Group Captive is formed by a group of individuals or entities that come together to jointly own a captive insurance company. You can have a homogeneous Group Captive, which typically covers insureds in the same industry group; or a heterogeneous Group Captive, which allows a group of insureds from entirely different industry groups to own the captive jointly. Group Captives are typically for small to midsize businesses with premiums volumes not big enough to warrant owning or operating their own SPC. Members pool together resources to share their risks, as well as profits and losses. Since only businesses that are well run and safety focused qualify to join the Group Captive, the collective risk is much lower than in the general insurance pool. Group Captives typically cover Auto, Workers Comp and General Liability and require a minimum premium for each insured. The captive’s structure, retention level, aggregate stop limit, and service providers are all predetermined.
Association Captives are similar to Group Captives except that they are sponsored or owned by a group of entities within a particular organization with common insurance needs and similar exposures.
Protected Cell Captives
Protected Cell Captives (PCC) were created as way for smaller businesses to take advantage of a stand-alone captive without the expenses involved in forming one. Think of a PCC as a big, single piece of honeycomb with many hexes (cells) in it. A sponsoring entity sets up and owns the principal company (the honeycomb) and sells or rents the cells to businesses that need it. The financial arrangement includes working capital, surplus and licenses from the parent company, who also arranges the necessary administrative, claims, engineering, reinsurance placement and admitted fronting services. Under the protected cell structure, there is no pooling of risk between cells. Other benefits includes:
- Helps insulate the assets and liabilities of independent insureds
- Ensures individual cell assets will remain secure and protected from creditors of other cells or the parent captive
- Guards against harmful effects of adverse selection, losses and underwriting by creating a regulatory and accounting.
- wall around individual cell
Risk Retention Groups (RRGs)
Risk Retention Groups are liability insurance companies owned by their members. They allow businesses with similar insurance needs to pool their risks and form an insurance company that they operate under state-regulated guidelines. RRGs are formed using a combination of state and federal laws under the auspices of the Federal Liability Risk Retention Act (LRRA). All insureds of an RRG must be owners of the RRG, and all owners of the RRG must be insured. RRGs may be formed under a state’s captive or traditional insurance laws. The RRG is domiciled in one state, but may do business in any other state by completing a registration process and designating the state’s commissioner as agent for service of process.
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