What is a Captive?

A widely accepted definition of a captive insurance company is "a wholly owned insurance subsidiary of an organisation not in the insurance business whose primary function is to insure some or all of the risks of its parent or stakeholders. "  This definition has expanded over time as the industry finds more and more creative ways of using captives to support the business objectives of its stakeholders.

It is generally owned through a common interest which is not engaged primarily in the business of insurance. This interest may be a single-parent shareholder or a group of shareholders.

A significant portion of the risks written are "captive", related in some way to the risks of shareholders, or third-party risks which the shareholders control. In this respect a captive is "an insurer that writes risks whose origins are restricted, or those risks to which it has unique access".

(Visit the Cayman Islands Monetary Authority website at Insurance Statistics & Listings of Regulated Entities and scroll to Captive Market Statistics)

Typical coverage includes:

• Primary policy - coverage provided directly to the parent or stakeholders
• Fronted policy - coverage provided through the tradtional insurance market covering risks of the stakeholder group
• Excess coverage - coverage provided by the captive and then reinsured to the traditional reinsurance market
• An umbrella or stop-loss policy - coverage acquired by the captive in the traditional reinsurance market

Types of Captives

Single Parent Captive – This is an insurance or reinsurance company that only insures it’s parent of affiliated companies

Group Captive – This is an insurance company that insures or reinsures the risks of of either a homogeneous or heterogeneous group of companies who may, or may not, be owners of the company.

Association Captive – This is a company owned by a trade association and used to meet the insurance needs of it’s members.

Agency Captive – This is a company owned by an insurance agency which utilizes it to take risk on some of the business they place in the insurance market.

Segregated Portfolio Company “SPC” – This is a company which is set up with a “core” which usually doesn’t take risk and various segregated cells which take a particular risk. The assets and liabilities of each cell are segregated from each other. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participating agreement. This is a usefully vehicle for those programs not large enough to set up their own captive or who do not wish to manage their own captive.

Risk Retention Group (“RRG”) – This form of captive is available in U.S. domiciles and is an insurance company (RRG) licenced under the Federal Risk Retention Act of 1981, as amended in 1986, which allows an insurance company licenced in one state to write business in all states without going through the full filing requirements to get licenced there. An RRG is owned by it’s insureds and can only write liability business.