A captive is a company established to insure or reinsure the risks of its parent or associated third parties. Captives can take a number of forms, including:
- a single parent captive, i.e., a wholly owned subsidiary that insures the risks of is parent or affiliates;
- segregated portfolio, segregated account and protected cell companies;
a group captive - an insurance company jointly owned by a number of companies that have a common insurance need; - an association captive – an insurance company owned by a trade, industry or service group for the benefit of its members;
- an agency captive – an insurance company owned by an agency or brokerage firm to reinsure a portion of their clients’ risks; and
- special purpose vehicle – a company used extensively in the past for various financing arrangements but more recently used for catastrophe bond issues.
- risk retention group - an insurance company jointly owned by a number of individuals or companies with a common insurance need authorised by the US Liability Risk Retention Act of 1986 enabling the company to transact business in multiple US jurisdictions.
Captive Benefits
Captives are formed for a variety of reasons, of which the following are the most common:
-
increased awareness of risk management;
- reduction or stabilisation of the cost of insurance;
- lower expenses compared to traditional risk transfer/insurance companies;
- credit for good claims experience;
- insuring the uninsurable; and
- direct access to the reinsurance market.
Other advantages of forming a captive or are: creation of a profit centre; less onerous yet responsible regulatory framework, better control of multinational covers; additional capacity; managing group retention levels; and some potential taxation benefits.
- Select professional service providers
- Reserve preferred company name
- Prepared Business Plan and apply to regulatory authority
- Complete pre-incorporation documents
- Apply to the appropriate regulatory authority
- Select Board of Directors
- Applications approved
- Incorporate and capitalise company and convene activation meetings
- Submit insurance applications to regulatory authority
- Receive Registration Certificate
- Captive commences operation.
