What is a Captive Insurance Company?
A captive insurance company is, in its purest form, a subsidiary company formed to insure or reinsure the risks of its parent and / or associated group companies. Captives are usually formed to provide alternative risk management solutions to that of the conventional insurance market. The administration of a captive is usually, though not always, outsourced to a specialised captive manager.
There are a number of reasons why captives may provide a better means of risk management than the conventional market. The main points are outlined below.
Premiums charged by commercial insurers include amounts to cover the insurer's profit margin and overheads. Such overheads can be significant when considering insurers with large corporate structures to maintain.
When the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. When the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.
The process of making a claim from a third party insurer can be long and involve a good deal of cost for the claimant. Where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessay part of the claims handling procedures of commercial insurers.
Claims experience benefits
Captives generally retain a portion of the overall risk and reinsure the remainder. For this reason, when claims experience is better than anticipated, the excess of net premiums over claims is retained by the group. The reinsurance taken out by the captive is tailored to minimise the group's exposure where claims experience is worse than projected.
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