A captive is a specific insurance company established to insure specific risks. It allows a company (or group of entities) to formalise and maximise the benefits of a self-insurance programme. In the majority of cases a captive insurer’s owner and its customers (the Insureds) are one and the same - which results in captives being different from commercial insurance companies.
The conventional insurance market can be a cumbersome and inflexible risk management tool. Creating a captive insurance vehicle provides a bona fide self insurance mechanism, which can offer a superior alternative to the traditional insurance market for all or part of an insurance programme.
A captive can be either a direct writing insurer (underwriting the risks of its parent company), or a reinsurance captive where the business is initially written via a local insurer (referred to as a “fronting insurer”) with the risk(s) then reinsured into the captive.
Advantages fall broadly into two categories:
- Cost effective risk transfer where the traditional market is applying high rates, restricted cover, increased deductibles or where there is limited capacity; and / or
- The opportunity to retain underwriting profit derived from better than average loss records or niche portfolios of insurance business where the traditional market offers little or poor value.
Please refer to our download “Introduction to Captive Insurance Companies” for further information.