Captive Insurance Companies

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A Captive Insurance Company is an offshore vehicle within a corporate group whose business is to insure some or all of the risks of the group. Captives may participate in a corporate group's insurance and risk management programs as direct insurers of group companies or, where local regulations and other considerations require, as reinsurers. Captive Insurance Companies are normally incorporated in low tax areas. Today, there are over 6000 captives worldwide. Over 40% of the major US corporations have one or more captives. Verizon, Centex Homes, UPS and many others utilize these unique companies. Premiums charged by commercial insurers include amounts to cover the insurer's profit margin and overheads. Such overheads can be significant when considering insurers with large corporate structures to maintain.

Click here for a brief PowerPoint Presentation on Captive Insurance Companies

Plan Comparison	Retail Insurance	Self Insurance	Captive Insurance
Lower Insurance Cost	No	Yes	Yes
Provides Protection from Risk	Yes	No	Yes
Tax Deductible Premiums	Yes	No	Yes
Policy Design Flexibility	Yes	Yes	Yes
Control Claims	No	No	Yes

The principal advantages of captive insurance are:

•  Flexibility in policy design, premium payment timing, and claims handling matters

•  Access to the reinsurance market not normally accessible to non-insurance entities

•  Participation in underwriting profits

•  Accrual of investment income on outstanding claims

•  Improved risk management and retention

•  Cost stabilization

•  Provision of covers unavailable or overpriced on the conventional market

•  Detailed investigations must be made on a case by case basis, in order to match the best risk management strategies and facilities with the requirements of the group concerned.

The process of making a claim from a third party insurer can be long and can involve a good deal of cost for the claimant. Where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessary part of the claims handling procedures of commercial insurers.

The group's risks can be limited by the purchase of insurance above the limits provided by the captive or through the purchase of reinsurance for the captive. A captive may, subject to regulatory permits, offer cover for almost any type of insurable risk and may insure every risk of a corporate group or confine itself to certain categories of risk.

When the market is soft, captive companies can take advantage of the lower rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. When the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.

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