Captive Insurance Programs

 

 

Background

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 become unavailable.

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.

Captive Insurance Overview

What is a captive?

With a few exceptions, there are three characteristics that distinguish a captive insurance company:

  1. 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.

  2. 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 control.

  3. Finally, a captive may be either a direct writer, a reinsurance company or both.

  1. 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 another company.

  2. 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?

  1. Single Owner

  2. Multi Owner

  3. Association Sponsored

  4. Rent a Captive

What are the major advantages of a captive?

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:

  1. Insure the “Uninsurable” Risk

  2. Information and Control

  3. Risk Management Focus

  4. Additional Capacity

  5. Direct Access to Reinsurance Market

  6. Flexible Program Design

Does a captive produce profits for the principles?

While the primary reason for forming a captive is to make insurance coverage available and affordable, many captives recognize that an ancillary benefit may be the generation of profits from a variety of programs.