"A captive is an insurance company that is capitalized and wholly owned by one or more non-insurance companies to insure the risks of its owners. Rent-a-captives allow smaller businesses to rent the capital of a captive to enable them to receive the benefits of using a captive at a lower cost."
If sufficient income can be developed to meet costs and profitable underwriting results maintained, assuming risk through a captive can bring numerous advantages to corporations. In addition to all of the normal benefits associated with self-insurance, establishing a separate legal entity to act as a captive insurer has a number of unique advantages that do not exist with traditional self-insurance.
For example a new profit center can be established which can eventually expand its expertise, either to other classes of insurance or by offering cover to subsidiary companies that are not initially provided for. In addition expertise can be sold to other companies that may wish to take advantage of any unique underwriting skills that have been developed.
Another advantage is that access to the reinsurance markets is made possible and risk transfer solutions that protect the captive's capital base can be tailor-made according to each captive's requirements.
The emergence of captives as we know them today is thought to have first taken place following the Hurricane Betsy disaster in 1965 and then again in the mid-seventies
There are many advantages to forming a captive insurance company, but each party that makes the decision to establish a captive will have its own reasons. These reasons will normally center around a desire to increase earnings, provide insurance cover unique to the captive owner’s needs, improve claims management, create cash flow benefits as well as the desire to create a new profit center and expertise.
As every company looking to form a captive will have a different requirement and budget from another, different types of captive are available for both single companies as well as groups.
Before forming a captive insurance company, it is important to perform a feasibility study to determine whether or not the setting up of a captive is a viable proposition. Part of a feasibility study should involve a review of a company's current insurance program compared to what might be achievable under a captive insurance scenario.
Selecting a domicile is a key decision and one that is made at an early stage, since regulatory factors will have an impact on how a captive insurance program is put together.
All reinsurance contracts are categorised as either excess of loss or proportional (quota share) cover. Excess of loss reduces the exposure to a captive from an individual loss or single event to a specific amount or retention. By contrast quota share reinsurance pays an agreed percentage of any individual loss in return for the same percentage of gross premium after the deduction of administration and marketing costs.