For those not familiar with the term, "captive insurance" is used to describe an insurance company that exists for the limited purpose of insuring a sister or parent corporation. Typically, a large corporation with an extremely high cost to insure owns an insurance company as a captive solution. In order to save on these costs, the company funds their own private insurance companies. In turn, these companies write policies for the parent or sister company.
Establishing a captive can be tricky
Not every country or state provides for the establishment of captive insurance companies. To establish a captive, a location for that company must first be found. Then, after determining if the laws in a particular state permit a corporation to insure from that location, then the process of establishing the captive company can begin.
Certain rules and regulations apply
Each jurisdiction regulates its captive companies. While there is a common misconception that jurisdictions outside of the United States are somehow less regulated, on the contrary, these other nations have put in place a number of regulations for establishing banks and insurance companies in recent decades. Nowadays the insurance board at any jurisdiction will need to approve an application for any company. It will only be approved if the owners have large enough capital sums, typically in the millions of dollars, and a board of directors qualified to administer a captive company.
Types of captive insurance companies
Each jurisdiction will also govern the types of captives available. In general, there are five types available. Depending on the type of captive chosen, costs may go up or down. However, the least expensive captives are the least functional, while those offering the most function will come with higher costs:
- A single parent captive is set up to insure the risks of its parents and affiliates exclusively. It will have a lower capitalization requirement than other forms.
- Multiple participating companies set up an association captive; the purpose is to insure each company. This can be cost effective since the companies can pool their resources, but it can also present a conflict of interest if there is any dispute in the future over claims.
- Various companies jointly own a group captive as well, but these companies have no association with each other. They simply come together for the sole purpose of forming this company.
- An agency captive insures not only the parent companies but also the clients of the company. This structure often has the highest level of requirements since it services third parties.
- Finally, a rent a captive combines an agency captive and a single parent captive. Rather than being wholly owned, it has the unique distinction of being only rented, for an annual fee. The renter pays to obtain the administration and charter for a temporary period.
So there are several different ways in which to set up captive solutions depending on the need of the organization. Deciding on the best option for a particular organization is the first step in creating a viable solution to insurance risks and concerns.
Richard L. Hunt is an Insurance Agent for Caitlin Morgan Insurance Services in which they are located in Indiana. Caitlin Morgan specializes in Captive Solutions, Nursing Home and Assisted Living Insurance and Worker's Compensation.
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