What is a Captive?
A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent or a number of similar corporations (e.g., trade associations) thereby contributing to a reduction in its parent’s total cost of risk.
Captives are usually domiciled in a specialized location, either offshore or onshore, and sometimes write business unrelated to their parent. Captives are formed for many reasons:
- lack of commercial market for certain lines of coverage;
- desire to recapture underwriting profits and investment income that would otherwise be earned by the commercial underwriter;
- as a means to access the reinsurance market; or
- in certain circumstances, as a means of diversifying into insurance services.
Captives are used extensively throughout the world by major corporations to cover risks situated both at home and abroad. The largest developments historically have been in the United States, the United Kingdom, and Europe, but recently, considerable interest has been evident in South America, and in the Far East, particularly from Japan and Australia. As the trade barriers throughout the world are lowered and companies become more internationally-oriented, insurance buyers are taking a more global approach to risk financing. Captives can play an integral role in the successful implementation of a global risk financing strategy.
The Benefits of Managing Your Own Risk
Captive implementation is one of the premier alternative risk finance solutions—one enjoyed by many Fortune 1000 companies and now, increasingly, by smaller companies. Once viewed primarily as a solution to counter rising premium costs, captives actually offer many potential benefits that are difficult
- Captives are designed to enhance your 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 is 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, employee benefits—but also difficult-to-insure exposures—such as environmental risks, and employment practice liabilities.
- The ability to design your coverage as you need it, not as outlined by a commercial insurer. Your coverage can be broader, policies simpler, and risks more manageable. A captive also helps to facilitate the most effective claims-handling methods and loss-control programs.
- Creating a self-owned insurer, such as a captive, may offer the benefits of greater control and reduced costs, both of which have a significant impact on your economic security and profitability.
- Captives may provide significant revenue benefits. Premium payments are made directly to your captive, allowing reserves for unpaid claims and unearned premiums to be invested, offering you the ability to establish reserves from pre-tax income otherwise unavailable to a non-insurance entity. These revenues further strengthen the captive itself, eventually positioning the entity for more favorable reinsurance opportunities.
Our professionals work with you every step of the way, from the incorporation of your captive through its active day-to-day management, with a wide variety of offerings—including accounting, insurance, claims, personnel, and management information services. Marsh also holds established relationships with key service providers such as auditors, lawyers, and actuaries to help you run your captive smoothly, cost-effectively, and with the strategic and financial benefit most appropriate for your business.