The use of captives has almost become the norm rather than an innovation for larger corporations.
Yet captives are still somewhat of a misunderstood alternative for organizations that do not currently operate one. As of 2015, captives represent roughly half of the U.S. insurance market and continue to grow in popularity with midsize employers. With the recent creation of new captive structures, clarification around tax and accounting implications, many midsize privately held organizations and high net-worth individuals look to captives to finance their insurance.
What is a Captive?
A closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and which the original insureds are the principal beneficiaries. A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims management policy, and investment.
Why Form or Join a Captive Program?
A closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and which the original insureds are the principal beneficiaries. A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims management policy, and investment.
Who Should Consider a Captive?
Premium size:
In order to overcome the start-up costs and ongoing operating expenses most captive programs will require annual premiums of $500,000 or more.
Good historical loss experience:
An insured with a good historical loss experience that is experiencing premium increases resulting from the commercial insurance market is an ideal candidate for a captive program.
Commercial market availability:
Lines of insurance or industries that have become disfavored by the commercial market are good candidates for captive insurers. Disfavored industries suffer from a supply and demand misbalance and are typically overcharged. A captive can help bring back the balance.
The captive program’s primary purpose is to more efficiently manage organization-wide retained risks. In the right situation a captive can provide significant benefits to the organization. Its review and implementation should, however, not be taken lightly as they are complex structures subject to rigorous regulatory environments. Only a well planned and managed captive program will achieve full potential and be in a position to adjust to the organization’s needs.