wiseGEEK: What is Captive Insurance?
Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or companies. It is essentially an “in-house” insurance company with a limited purpose and is not available to the general public. This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured.
Companies both large and small can have a difficult time finding and affording traditional insurance policies to cover their risks and assets. Premiums are increasing, making insurance coverage nearly cost prohibitive for most companies, leaving them vulnerable to catastrophic loss. Some companies have risks that are difficult or impossible to cover. Increasingly, traditional insurance companies are setting up their credit rating structures without considering actual loss experience, but rather, trends in the market, making it difficult for many companies to qualify for coverage. Another stumbling block for companies is that they might have insufficient credit for deductibles and exercise poor loss control, which in turn makes them ineligible for coverage. Captive insurance can be a solution.
There are five basic types, with the first being the most prevalent, the Single Parent Captive. in which an insurance or reinsurance company is formed simply to insure the risk of a parent company or its affiliates, which are not insurance companies. The Association Captive is an insurance company that is formed and owned by an industry, trade, or service group strictly for the benefit of its members. The Group Captive is owned
by a group of companies and provides them with a captive insurance company for a shared insurance need.
An Agency Captive is a reinsurance company owned by a separate insurance company to reinsure their client’s risks. Reinsurance is a type of insurance in which insurance companies share the burden of a catastrophic loss with other insurance companies, usually on a global basis. Put simply, an insurance company buys insurance to cover its own loss when its claims are devastatingly high. The last type is the Rent-A-Captive. which provides the benefits of a captive company for a fee to small companies that may not have the resources to form their own.
The financial benefits of this type of arrangement can be significant. Premiums tend to be lower simply because, with commercial insurance. premiums are padded to cover the insurance company's own profit margins and overhead costs. With captive insurance, companies are not attempting to make a profit, but simply to provide themselves with low cost insurance coverage. It's also more flexible than traditional insurance, because the company can adjust the proportion of assumption of risk or the amount of reinsurance depending on how soft or hard the market is.
Another benefit is in claims management. With “in-house” insurance, a company cuts through the red tape and bureaucracy associated with traditional insurance companies, and the parent company can dictate the procedure by which claims are processed. Perhaps one of the biggest benefits is that excess net premiums can be recouped by the parent company when claims are low, and they can increase reinsurance in riskier areas.Source: m.wisegeek.org