What You Should Know About Captives

Captive insurers are insurance companies that are owned by those they insure. These companies are started to meet specific uninsured or costly insurance needs of their insured owners. Although it may seem like a relatively new concept, the captive insurance industry has been around since the 1940s and was targeted for extensive regulation by the IRS in the 1970s.

Traditional Insurance

Traditional insurance provides coverage to almost any person or industry based on an underwritten review. Their purpose is to mitigate losses, but these losses are general and shared among industries or individuals. Traditional insurance companies’ clients do not own the company and they pay specific premiums based on their underwritten review of their risks. These companies typically handle large losses.

Captive Insurance

Captives are a private insurance companies started for a specific purpose by the people or companies they insure. These companies provide alternative risk financing. Because they are insurer owned, captives are customized to specific risks and industries. For example, they may only cover cybercrime, inclement weather or equipment failures for a specific construction company.

Captives are typically formed to provide supplemental insurance. In addition, these companies are typically small, so they are flexible and able to more easily react to market changes. Captives also provide an income source for their owners.

Captive Operations

Captives choose their partners carefully because the insureds’ assets are at risk. Therefore, these companies should have experienced underwriters, investors, auditors, claims management and legal support. In addition, a reinsurer may hold and manage the captive, but one or more committees may be set up to oversee the management team. Because captives are income sources, their management is crucial and must be monitored.

If you have areas in your company that you cannot insure through traditional insurance or if the cost of insuring these risks is too high, creating a captive may be an option. Not only can you supplement and customize your coverage, but you may also develop a new source of income.