What is a Captive?
A captive insurance company is the most effective risk management tool on the planet. The first captives were formed more than half a century ago and were what we now refer to as Single Parent or Pure Captives. That is to say an insurance company owned by a corporation that insures only the risks of that corporation. It can insure any of its parent’s risks, including some that conventional insurance companies would not cover.
Over the decades the captive movement has evolved and there are now over 6,000 captives in many different forms. There is no limit to the ways in which captives can be set up but some of the common types are:
Single Parent Captive: Sometimes called a Pure Captive, this is the original concept where a parent company sets up a captive, the only function of which is to insure the parent’s own risks. This was quickly extended to include the risks of other subsidiary and affiliated companies of the same group. Regulations have also evolved over the years and in the US, single parent captives must now insure unrelated or third party risks in order to qualify as proper insurance companies.
Group Captive: This is a captive that is owned by a group of companies, often in the same industry, that have combined to insure common risks.
Association Captive: There are many business, trade and professional associations, the members of which are corporations. An association can form a captive that is designed to insure its members, often against risks that are unique to that association.
Agency Captive: Usually formed by an insurance broker or agency to insure its own clients. This can be to protect and expand its business or to allow it to participate in profitable lines.
Protected Cell Captive: Sometimes called ‘rent-a-captive’ is where the captive is divided into cells each one of which insures the risk of one particular corporation. Each cell is segregated from all the other cells so that it is not affected by the claims experience of the other cells. The cells can take several different forms, including non-voting preference shares and, more recently as separate corporations such as the Series Business Companies in Delaware.
Risk retention Group: Risk Retention Groups (RRGs) are unique to the US. They arise out of the Federal Risk Retention Act which provides that the insurance company can be licensed in one state and allowed to do business in every other state. A Risk Retention Group (RRG) must be owned by its insureds and can only write liability business. RRGs can only be formed in one of the 50 US States and not in the US Virgin Islands or any other non-state territory.