Definition Of Captive Insurance

If you feel powerless against the rising costs and inflexibility of commercial insurance, you’re not alone. That’s why forward-thinking business owners are turning to an alternative risk management strategy known as captive insurance. Essentially, a captive insurance company is a wholly owned subsidiary that provides risk mitigation services specifically tailored for its parent company. While captive insurance companies have been around since the 1960’s, they’ve gained immense popularity over the last decade as a smart way for mid-size and large companies to take control over their insurance costs and coverage.

With customized coverage, increased control, and significant tax incentives, setting up a captive insurance company could be a total game-changer for your business’s risk management and long-term success.

A captive insurance company offers an affordable, customized insurance solution that finally puts you in control of protecting your assets without compromising profits. Key benefits you can expect include:

  • Tailored coverage for your specific risks
  • Stable, long-term pricing independent of market fluctuations
  • Underwriting profits retained rather than paid to commercial insurers
  • Tax advantages and incentives can further reduce costs
  • Greater control over your risk management and claims handling

Captive insurance companies emerged as a creative alternative in response to challenges with traditional commercial insurance. A captive insurer is a legally licensed insurance company that is formed primarily to insure the risks of its parent corporation and affiliated companies. It essentially allows a business to “self-insure” by creating a separate entity to underwrite risks and process claims. Captive insurance companies are typically wholly owned subsidiaries of the parent company, which has full control over the captive insurance company's operations and underwriting decisions. Currently, over 90% of Fortune 500 companies utilize captive insurance.

One of the key distinctions between commercial insurance and captive insurance boils down to motivation. Commercial insurers are ultimately driven by profit motives and answers to shareholders. As a result, they seek to limit policyholder payouts wherever possible to boost profits. Captive insurers, on the other hand, are driven by the risk management priorities of their parent companies. Their incentives are aligned with their owners’ goals of protecting assets cost-effectively rather than generating shareholder returns. This difference in underlying motivation is why captive insurance can provide specialized coverage often unavailable in the commercial market.

Forming your own captive insurance company is a complex, multi-step process that requires working with experienced captive insurance professionals. The 5 key steps are:

  1. Conduct a feasibility study - Analyze your risks, required coverage, and premium costs to determine if a captive insurance company makes financial sense for your company.
  2. Select domicile and captive insurance manager - Work with a consultant to select the optimal captive insurance domicile based on regulations, taxes, and incorporation costs. Also, choose a reputable captive insurance management company.
  3. Develop a business plan and capitalization model - create a detailed business plan for your captive insurance company, including proformas, capital requirements, and reinsurance needs.
  4. Incorporate the captive insurance company - Work with local counsel and regulators to legally form the captive insurance company in your selected domicile.
  5. Implement operations - Develop insurance policies, underwriting guidelines, and claims handling procedures. Capitalize the captive insurance company and begin underwriting risks.


Can’t Beat Your Insurance Company? BECOME ONE!

Find Out How Ready Your Company Is For A Captive Insurance Plan.

Free Assessment