Captive Insurance

Take control over how you’re insured

If your company or group is looking for greater financial control and management over insurance risks, a captive may be the answer.

What is a captive?

It’s a property and casualty insurance company owned by the business itself. This type of self-insurance is primarily used to protect business owners from risks and benefit from underwriting profits. What this means in simple terms is that you form your own insurance company to provide insurance to yourself or affiliated groups. You are the owner, you control it and you can take the profits that would normally go to a third party insurance company and re-invest.

How does it work?

A captive insurance company is similar to traditional insurance. It issues policies, processes claims and is required to follow certain regulations. What makes a captive different is the decision to keep or distribute any profits made by the captive company. With traditional insurance, the insurance company and shareholders – not the insured business – keep the profits. Captives can often provide coverage for unique or specific risks (broader coverage) that would not otherwise be insurable by the standard markets. Creating a captive has so many more benefits besides just profit motives such as stability in premiums and control over the program. Captives also allow a company’s risk to be graded on its own merit, rather than being charged a premium that is based on the risk of its entire industry. As a general rule, insurers allocate 60% or more of premiums charged to loss payments, while the other 40 percent or so covers expenses and profits. Captives have far fewer expense components than do commercial insurers (marketing expenses is one example of a lower expense). Estimates for the expense components of captives typically fall in the 15 percent to 30 percent range. This means that for every $10 million in net written premium, a successful operating captive can save insureds $1 million to $2.5 million in expenses alone. If you assume conservatively that expenses will be on the higher end at 30% and you incur 0% in losses, then that leaves 70% in potential profits. Taking the same $10 million in net written premiums, that is now $7 million insurance savings. Note, this assumes 0% to loss premiums which would not be consistent over a long term horizon.

Pure Captives

The term “pure captive” is generally used to describe captives insuring only the risks of their owner or owners. Single-parent captives have only one owner. Group captives have multiple owners.

A group captive is formed by a group of individuals or entities that come together to jointly own a captive insurance company. Industrial insured group-owned captives typically insure only insureds in the same industry group, or with homogeneous risk, which creates group buying power and other risk management efficiencies.

Another kind of group-owned captive allows a group of insureds from entirely different industry groups to own a captive jointly. This type of heterogeneous group captive may be a reinsurance pool, formed to create underwriting capacity through the pooling of risk. A reinsurance pool does not provide direct insurance. It reinsures either the captives of its owners or the admitted insurers that issue policies to the pool’s owners. The group captive or pool may also provide other risk management services for the group.

Sponsored Captive Insurers

Sponsored captive insurers, sometimes referred to as “nonowned” or “nonaffiliated” captives, have many of the same elements as a pure captive insurer. The insureds are required to put their capital at risk, risks are financed outside of the commercial regulatory environment, and the purpose is to achieve the risk financing objectives of the captive’s insureds. However, a sponsored captive is not formed by its insureds—known as “participants,” and a sponsored captive does not necessarily pool its insured’s risks.

A sponsored captive may be set up by an insurance industry-related entity to be used by its clients, or there may be no previous connection between the sponsor and the participants. The sponsor contributes the captive’s statutory capital (sometimes called core capital). Many sponsored captives do not require insureds to pay in capital, but simply to pay an access fee. These are sometimes referred to as “rental captives.”

Sponsored captives may be used by insureds that are too small to own their own captives. The captive cell program acts like an incubator for these small insureds to begin a captive program. When sufficient surplus has been accumulated, an insured has the option of using those funds to set up its own pure captive insurance company.

Keen Coverage

It is our job to shop multiple insurers on your behalf. We will invest the time to get to know you and your family’s background so that we can offer a full insurance plan. This includes health, life insurance, long term care, disability, business, and surety policies.