Definition of Captive Insurance

Tulsa Financial Reporting Services


Is a Captive Insurance Program right for you?

A captive is an insurance company that provides insurance to, and is controlled by, its owners. In essence, a captive serves as a premium funding vehicle for self-insuring the losses of the parent organization for a specific retention level designated by the parent. A captive may be owned by a corporation, individual or an association, domiciled onshore or offshore, and has the option of writing the business of unrelated parties.

Why are Captives started?

A captive might be considered for some of the following reasons:

  • Reduction and stabilization of premiums
  • Insuring the uninsurable
  • Controlling your own insurance program (i.e. stability of premiums)
  • Positive impact on risk retention, risk management and loss control
  • Cash flow benefits
  • Estate planning
  • Direct access to the reinsurance markets
  • Potential tax benefits
  • Consolidation of deductibles
  • Reducing dependence on commercial insurers and insulating from insurance market cycles

Captives are not effective if:

  • You are looking for short term premium reductions
  • Your premiums are under $150,000
  • You have a loss ratio above 80%
  • You are unable to allocate adequate resources

There are 4 types of Captives:

1. Single parent or pure captives

2. Group captives

3. Rent-a-captive

4. Association captives

The formation of a captive insurance company is a lengthy process (up to 12 months) including feasibility studies, financial projections, determining domicile, and, finally, preparing and submitting the application for an insurance license. The need for a qualified insurance manager on the planning team is very important, particularly in the formative stages. Selecting a location or domicile is also very important. There are a number of states and off shore locations that offer a variety of tax benefits.

Captive insurance companies can help small and middle-market businesses save money and improve insurance coverage. Captive insurance companies can also serve as an estate planning vehicle. Recent eligibility changes have made captives more attainable for smaller organizations.

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