Corporations may form captive insurance companies to address a specific risk that cannot be insured against in the commercial insurance market. Captives allow these companies to control the insurance company’s strategic business, safety and loss and claims management.
These insurance companies only write policies for their parent companies. These captives cannot write policies for any company or group that does not have ownership in the captive.
Pure captives may be single-parent or group captives. Single-parent captives have a single corporate owner. For example, a physician’s group may start a captive to supplement the group’s malpractice insurance or an oil company may start a captive to insure against the risk of an offshore well leak. In this instance, one company starts and benefits from the insurance company.
Group captives are created when a group of individuals or companies start an insurance company. All the owners have a similar risk and are typically in the same or similar industries. For example, several toy manufacturers may work together to create a captive to insure against product liability.
Nonaffiliated captives are not created by those they insure. These insurance companies may be started by one company to insure the risks of the company’s clients, or the parent company and insured companies may have no previous relationship.
However, they also require that their insured clients risk their capital through paying premiums. They are also not financed through the commercial insurance market. These insurers may require a capital investment in addition to premiums, and they may charge an access or rental fee. Those who invest capital and become shareholders or members may risk their investments based on how the group as a whole performs.
Each insured company undergoes a separate underwriting process. Therefore, one insured cannot be paid from another insured’s account unless a prior agreement exists.
Unlike commercial or mutual insurance companies, captives are formed by companies or groups that place their own capital at risk to insure against emergencies. Companies that experience traditionally uninsurable risks may consider starting or joining a captive insurance company.