Captive Insurance

The International Association of Insurance Commissioners (IAIS) defines a  captive as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, other than an insurance or reinsurance group entity, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities, and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties.”

The term “captive” was coined in the 1950s by Frederic M. Reiss, a property engineer turned insurance broker in Youngtown, Ohio. Reiss, known as the father of captive insurance, used the term “captive” to describe an insurance company he helped form to provide insurance coverage solely to the parent.  In 1958, Reiss incorporated American Risk Management and began to assist corporations in setting up captives.  During this time, U.S. regulations made it prohibitively expensive to form and operate captives in the United States, leading Reiss to seek out other jurisdictions to allow his captive idea to flourish.  In 1960, Bermuda became an offshore financial center and, in 1962, Reiss set up the first modern-day captive there called International Risk Management Ltd.

Types of Captives

  • Single-Parent Captive – A company writing only the risks of its parent and/or affiliates. Single-parent structures are often referred to as wholly owned or “pure” captives.
  • Group Captive –A captive established by a group of companies with similar businesses or exposures writing only the risks of its owners and/or affiliates.
  • Association Captive – A captive owned by a trade, industry or service group (e.g., doctors) writing only the risk of its owners and/or affiliates. An association captive is similar to a group captive except that it is sponsored or owned by a group of entities within a particular organization with common insurance needs and similar exposures.
  • Rent-a-Captive – A captive owned by an outside organization and open to participants for a fee. Members “rent” licenses and capital from the rent-a-captive owner. A rent-a-captive, or rental captive, is often used by entities that prefer not to form their own dedicated captive or for a program that is too small to justify incorporating its own captive.
  • Risk Retention Group (RRG) – Approximately 250 RRGs in the U.S. are organized as captives. An RRG is an association or group captive formed for the principal purpose of assuming and spreading risk for commercial liability exposure. It is important to note that not all RRGs are licensed as captives. The formation of RRGs is authorized by a federal law—the Liability Risk Retention Act of 1986—that limits many of the regulatory requirements that otherwise might be imposed on RRGs by non-domiciliary states.

Today Captives have evolved to underwrite every type of risk imaginable.  The flexibility and more favorable regulatory environment have made captives a viable risk management strategy for businesses of all sizes.

While most business owners interested in managing their own risk through captive insurance may not have the expertise necessary, the ability to contract with service providers with the relevant experience can allow the business to focus on what it does best and not saddled with learning a new industry.