Single Parent Captives
A Single Parent Captive, sometimes known as a pure captive, is an insurance subsidiary that provides insurance to cover the loss exposures of its parent company.
Whilst no insurance risk is transferred out of the organisation, except through reinsurance arrangements designed to protect the captive, a pure captive allows a company to monitor its operational risks, review its loss exposures and to provide efficient claims management to it and its subsidiaries.
A Group Captive is a captive that is owned by a number of different parent companies who are normally from the same industry.
Companies often elect to use a group captive when:
Group captives can have a potential drawback in that that profits can be impacted by the poor performance of any single party. Consequently, group captives often employ independent underwriting managers to accept and decline business.
An Association Captive is similar to a group captive except that it is sponsored or owned by an association, which is normally homogenous in nature.
Industry captives are group captives established by organizations from the same industry, often to solve a specific insurance problem such as the unavailability of a type of insurance.
Risk Retention Groups
Risk retention groups are a form of group captive formed under the Federal Liability Risk Retention Act of 1996. This law allows a group of people to form a risk retention group providing that they are all owners, from the same industry and are not writing personal lines or workers compensation business. Risk retention groups are licensed as insurers by individual states and consequently avoid the need to obtain a front company to put in front of a captive.
A rent-a-captive is an arrangement whereby an existing captive’s capital base is accessed by a third party that wishes to form a captive but without the cost or time involved in having to incorporate a separate entity. Often renting a captive is a first step towards the formation of a single parent, group or association captive once experience has been established. Rent-a-captives usually earn fees based on the volume of income being ceded depending on the size of the volume.
One of the key issues to a rent-a-captive owner or manager is to ensure that the capital base is not at risk from a poor loss ratio of any of its users. This can only be accomplished by ensuring that there is no financial risk to the rent-a-captive from any of its users. In order to achieve this, the captive owner is required to purchase reinsurance as well as to provide collateral to bridge the difference between the net premium to the captive and the point at which reinsurance stop-loss cover applies, commonly known as 'the Gap'.
Protected Cell Captives
Protected Cell Captives are similar to Rent-a-Captives except that the assets of each user are protected from one another by law. Each user is referred to as a 'cell' and the operation of each cell is controlled through a cell user's agreement with the captive. As the supporting capital base of the Protected Cell Captives is still at risk, part of this operating agreement normally requires cell users to collateralize any risk gap (the amount between premiums and the point at which reinsurance attaches) to the captive.
Also known as segregated cell captives, Protected Cell Captives originate from Europe where the Protected Cell Ordnance was passed in Guernsey on 1 January 1997. Since then most of the major captive domiciles have introduced legislation to allow Protected Cell Captives to operate and are becoming increasingly popular.
A micro captive is a captive insurance company which has an annual written premium of less than $1.2 million. In the USA, micro captives are taxed under Internal Revenue Code § 831(b), which provides that a captive qualifying to be taxed as a U.S. insurance company will pay tax only on investment income.
A captive insurance company that accepts business other than its parent company’s business.
Special Purpose Vehicles (‘SPV’s)
Special purpose vehicles are captives that reinsurance companies that issue reinsurance contracts to their parent company and then cede the risk to the capital markets by way of a bond issue.
Also in this section
A Brief History of Captive Insurance
Reasons to Set Up a Captive Insurance Company
Performing a Captive Insurance Company Feasibility Study
Selecting a Captive Insurance Domicile and Captive Manager
Reinsuring Captive Insurance Companies