The world insurance market is
subject to significant underwriting cycles where rates, premiums,
insurer's profits and availability of coverage alternately rise and fall,
rather than growing smoothly. The result: shortages in capacity
occur, premium rates are volatile and may exceed reasonable levels
as the insurance industry tries to recover losses from poor years and some
lines of business, such as directors and officers liability, may
Risk managers and insureds seeking
an alternative to market fluctuations have increasingly turned to
"captive" insurance companies for their answer. The captive
insurance concept has stood the test of time. It has grown to exceed 3,200
captive insurance companies worldwide, writing an estimated US$60 billion
in premium per year, or more than a third of the total commercial
insurance market in the United States. Bermuda is home to half of
the world's captives, including many owned by Fortune 500 companies.
What is a captive?
With a few exceptions, there are three characteristics that distinguish a
captive insurance company:
It is generally owned through a common
interest which is not engaged primarily in the business of
insurance. This interest may be a single-parent shareholder or a
group of member/shareholders.
Secondly, as the name implies,
all or a significant portion of the risks written are
"captive", related in some way to the risks of
member/shareholders, or third-party risks which the shareholders
Finally, a captive may be either
a direct writer, a reinsurance company or both.
As a direct writer, the
captive accepts business directly from policyholders. The captive
generally retains a part of the risk and reinsures a portion risk to
As a reinsurer, the captive
assumes business from an admitted or a licensed direct-writing
company. In such an arrangement the captive may retain the risk
assumed from the direct-writing company, or it may reinsure a
portion to another company.
What are the
different types of captives?
Rent a Captive
What are the
major advantages of a captive?
reinsurance company can provide a fast way to enter new markets, earn a
return for its member/shareholders and gain firsthand experience in those
markets operations - all with a relatively modest commitment of capital and
resources. The major advantages of a captive are:
Risk Management Focus
Direct Access to
Flexible Program Design
produce profits for the principles?
While the primary reason for forming
a captive is to make insurance coverage available and affordable, many
recognize that an ancillary benefit may be the generation of profits from
a variety of programs.