Why Establish a Captive Insurance Company?
A captive insurance company is a subsidiary or program you establish for your business to insure against the risk of loss, such as property and casualty, general and product liability, workers’ compensation, automobile liability and medical malpractice. A captive can bypass the commercial insurance market, enabling you to purchase insurance directly from reinsurance companies at significant cost savings.
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Benefits of Forming a Captive
- Risk Selection and Mitigation - Captives allow companies to structure the type and amount of risk you wish to retain. You may include risks that are currently uninsurable or insurable only at prohibitive costs. Risks that you do not retain for your own account can be covered in the reinsurance market.
- Improved Cash Flow - By establishing a captive insurance program, you maintain control of your premium payments and direct the management of those funds according to your own investment strategy. This enables you to maximize the yield on the portfolio commensurate with risk and to structure the maturities to meet your cash flow requirements.
- Protection Against Price Fluctuations - Captive insurance may stabilize your risk management costs. Market factors beyond your insured risks lead to volatile insurance pricing. When you insure through a captive, premiums are determined by your company’s own loss experience rather than the experience of a peer group, whose loss ratios may be much higher.
- Coordinated Risk Management - Industry associations or captive subsidiaries without a multi-corporate structure are able to band together for group funding. Consolidation of coverage and centralization of administrative support are cost-effective strategies in an increasingly competitive world
Types of Captive Subsidiaries
- Single Parent - Single parent captives are wholly owned subsidiaries of the parent company. As such, the lines of insurance and the structure of the program can be readily customized to meet individual company or corporate-wide needs. Single parent captives can also insure related or unrelated (third-party) risk at the discretion of management. Typically, an annual premium of at least $1.5 million is required to achieve the desired cost benefit.
- Multiple Parent - Multiple parent captives are jointly owned by a group of companies or persons in the same industry. They are also known as group, homogeneous or joint venture captives. Group coverage allows for customizing for your specific needs. Multiple parent captives consist mainly of workers compensation, auto liability and damage, and general liability. Typically, an annual premium of $500,000 is required to make your participation financially attractive.
- Heterogeneous - For companies of similar size but from varying industries, heterogeneous captives provide an opportunity to pool resources and form a joint venture captive. This is also known as an association captive. Participants in a heterogeneous captive share risks at a predetermined layer. Typically, an annual premium of $500,000 is required to achieve the desired cost benefit.
- Rent-a-Captive - For companies within the same industry not large enough to take advantage of forming their own captives, a rent-a-captive provides them an opportunity of obtaining benefits similar to owning a captive. There is generally no sharing of risk among the participants. The owner of the rent-a-captive charges the participants a fee. Over time, if the captive proves successful, the underwriting profits plus investment income may be returned to the participants. Rent-a-captives have higher fixed costs and minimal entry barrier expenses (legal, licensing). Typically, an annual premium of as little as $250,000 is required to achieve the desired cost benefit.
- Segregated Cell - Individual cells in a segregated cell captive enjoy legal insulation of assets and liabilities. Legislation has been approved in all major domiciles. Cell segregation varies by demographics, risk profile and lines of coverage.