Understanding Captive Insurance

The term "captive insurance" can be used to describe an insurance company that exists for limited purposes of insuring a sister or parent corporation. Typically, captive insurance companies are owned by large corporations with an extremely high cost to insure. In order to save on these costs, the companies fund their own private insurance companies. These companies in turn write policies for the parent or sister company. 

Establishing a Captive

Not every country or state provides for the establishment of captive insurance companies. There are certain areas, though, where jurisdiction is very favorable for captives. Namely, Bermuda, Panama and other South American and Caribbean nations have made themselves prominent locations for captive insurance companies. To establish a captive, you must first find a location for that company. Then, you must determine if the laws in your state permit you to insure from this location. Once this initial research is complete, you can begin the process of establishing your company.

Rules and Regulation

Each jurisdiction regulates its captive companies. There is a common misunderstanding that jurisdictions outside of the United States are somehow less regulated. On the contrary, these nations have put in place a number of regulations for establishing banks and insurance companies in recent decades. Today, the insurance board at any jurisdiction will need to approve your application for a company. It will be approved only if you have a large enough capital sum, typically in the millions of dollars, and a board of directors qualified to administer a captive company. 

Types of Captive Insurance Companies

Each jurisdiction will also govern the types of captives available. In general, there are five types you will be choosing from. Some jurisdictions restrict this list to only one or two types. Depending on the type of captive you choose, your costs will go up or down. The least expensive captives are the least functional, while those offering the most function will come with high costs.

  • A single parent captive is set up to insure the risks of its parents and affiliates exclusively. It will have a lower capitalization requirement than other forms. 
  • An association captive is set up by multiple participating companies with the purpose of insuring each. This can be cost effective since the companies can pull their resources, but it can also present a conflict of interest if there is any dispute in the future over claims. 
  • A group captive is jointly owned by various companies as well, but these companies have no association with each other. Rather, they come together for the sole purpose of forming this company. 
  • An agency captive insures not only the parent companies but also the clients of the company. This structure often has the highest level of requirements since it services third parties. 
  • Finally, a rent a captive is a blend of an agency captive and a single parent captive. It has the unique distinction of being only rented, for an annual fee, rather than wholly owned. The renter pays to obtain the administration and charter for a temporary period. 
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