What is Captive Insurance? Definition| Purpose, and Factors

What is captive insurance?

Generally, a captive insurer” can be defined as an insurance company that is basically owned, controlled, and managed by its insureds with the very aim of ensuring the risks of its constituents, owners, or members.

It is also insured under the ownership of a subsidiary insurance company of a non-insurance parent corporation whose primary purpose is to insure or reinsure the risk of the group of which it is part.

Captive insurance is a recent development in “self-insurance”; and is not common in developing countries. The owners of captive insurance commit their own money taking a portion of the risks instead of investing their capital to use any commercial insurer which has high pricing and may not likely meet the specific needs of the company.

The balance is managed by a “reinsurance” company. However, this alone can lead to higher risk when large claims occur, and can also save money for small claims because the company accumulates the money otherwise paid to commercial insurers.

Some of the captive insurance are located at tax havens {that is tax refers to geographical areas that have special regulations and favorable taxation rules}.

There is offshore captive insurance which includes; the isle of man, the Cayman Islands, Bermuda, and Guernseyand onshore like Vermont and Colorado in the united state of America and Dublin and Luxembourg in Europe.

Purpose of Captive Insurance

Some of the major purposes of captive insurance are as follows.

a. Risk management: The main purpose of captive insurance is the ambition to insure for business risks for which the commercial insurance company does not offer a desired or proper cover or does not provide a complete indemnity which may expose them to a heavier loss.

b. Easy decision making: One of the main purposes of captive insurance is to fasten the decisions that can contribute to the growth of the company; this is because insurance decisions would not only help the owners of captive insurers achieve risk reduction but also signal the market the existence of prudent management.

c. Control: In captive insurance, companies enjoy the safety, thereby controlling heavy losses and claims administration due to their mutual relationship with the parent company.

d. Intention to create their own coverage: The main purpose of captive insurance is to avoid the use of local commercial insurance companies, which have volatile pricing and may not meet the specific needs of the company to cover for business losses, thereby creating their own coverage by themselves.

Factors that Discourage Captive Insurance

a. Poor management: When the contributed capital of the captive insurers is not properly handled, it may mal or destroy the interest of the group should the insured events occur and the fund is not readily available.

b. Huge financial involvements: The decision to own captive insurance would involve substantial financial commitment which otherwise could be profitably retained in the parent company for its expansion.

c. Unsteady cash outflow: The best candidate for captive insurance is basically a company with constant or steady cash flow, high insurance premiums, and low claims frequency; outside this, the failure of the program is hundred percent certain.

Forms of Captive Insurance

Basically, there are three forms of captive insurance.

i. Single Parent captive insurance

ii. Association captive insurance and

iii. Rent-a-captive insurance.

Summary

We have earlier established the fact that captive insurance is that type of insurance that is basically under the ownership and control of its insureds.

The owners of captive insurance commit their own money taking a portion of the risks instead of investing their capital to use any commercial insurer which has high pricing and may not likely meet the specific needs of the company.

Risk management, quick decision-making, effective control, and coverage are some of the major purposes of captive insurance.

However, we also point out that poor financial management, unsteady cash outflows, and many others are among the factors that discourage captive insurance.