What’s a Captive?
A captive is an insurance company created to insure the risks of its parent or affiliated companies. It allows the parent to take more direct control of their risk management program in addition to enjoying several other benefits. Most fortune 500 companies have captive subsidiaries and in the last 5-10 years more small and medium sized companies have formed captives in order to enhance their risk control program and better manage expenses related to insurance.
Traditional insurance often contains exclusions to coverage and requires potentially prohibitive rates for certain types of insurance. A captive allows its owners to customize their program to include coverages not available and also to stabilize rates in areas that might be subject to rapid price increases (medical and professional liability and windstorm for example).
Direct access to reinsurance markets allows captives to take the risks they are comfortable with and utilize reinsurance markets for increased risk limits. Reinsurance can reduce the cost of overall exposure and provide valuable underwriting experience in pricing unique risks. Reinsurance benefits include the ability of the captive to free up capital, increase underwriting, stabilize operating experience, and better preserve their capital.