Weighing the Benefits of Captive Solutions
A captive is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, or in other words, the owners insure their own business entity in an attempt to reduce costs and create a stronger profit margin.
Captives are usually domiciled either offshore, or onshore in a specialized location, and in some instances write business unrelated to their parent company. Captives are formed for many reasons:
- Lack of commercial market for certain lines of coverage
- Desire to recapture underwriting profits and investment income
- As a means to access the reinsurance market, or
- As a means of diversifying into insurance services
Captive solutions are used to cover risks situated both at home and abroad, and for the most part are extensively used by major corporations. Most of these have been implemented in the US, the United Kingdom, and Europe, but considerable interest has been evident in Japan, Australia, and South America.
With the lowering of trade barriers throughout the world, which has increased companies doing more business internationally, insurance buyers are taking on more risk financing by way of insuring themselves. Captives can play an integral role in the successful implementation of a global risk financing strategy.
The benefits of risk self-management
Captive implementation is one of the premier alternative risk finance solutions. It has gone from a counter measure to rising premium costs, to providing potential benefits to companies that initiate the process, including; enhanced ability to manage the retentions and deductibles associated with traditional risk transfer programs (by forming its own subsidiary insurer to handle much or all of its own risk).
A company will also be freed from the control and restrictions of the commercial insurance market; the flexibility to fund not only traditional coverages (such as general liability, workers compensation, auto liability, property insurance, and employee benefits), but also difficult-to-insure exposures (including environmental risks and employment practice liabilities).
In addition it gives a company the ability to facilitate the most effective claims-handling methods and loss-control programs, along with creating a self-owned insurer, which may offer the benefits of greater control and reduced costs, both of which have a significant impact on economic security and profitability.
In closing, many captive solutions may provide significant revenue benefits. Premium payments are made directly to the captive, allowing reserves for unpaid claims and unearned premiums to be invested. These additional revenues further strengthen the captive, which can lead to even more favorable reinsurance opportunities.