A “captive” is a licensed insurance company utilized to insure a wide range of risks depending on business needs. Many businesses begin with coverages such as the deductible or self-insured portions of general liability, auto, casualty, property and workers compensation losses, but often expand coverages to include unique risks such as management liability, environmental liability, terrorism, cyber, professional liability, and extended warranty claims. Risks can be first-party or third-party, and companies can be creative in how they utilize their captive programs.
Entities with captives are diverse in scale and risk profile and include Fortune 500 companies, private companies, and non-profit organizations. Captive utilization spans across market sectors including automotive, telecommunications, technology, retail/consumer, manufacturing, healthcare, pharmaceutical, and energy.
Benefits of a captive include the ability to tailor coverage for hard to insure or emerging risks, apply alternative strategies to deal with insurance market cycles, provide financial incentives for loss control, offer flexibility in managing risk, offer creative insurance solutions, allocate costs to business units, and consolidate risk management.
A captive operates like a traditional insurance company and is subject to state regulatory requirements, albeit potentially less onerous than commercial market ones. Requirements include financial reporting, capital/ solvency support, reserve adequacy, and an annual actuarial opinion.
Corporations with self-insured risks within captive programs face unique challenges. PwC's risk modeling services team understands these unique risks, and can help to turn them into opportunities.
At the outset of 2020, risk professionals who were trying to purchase or renew insurance policies had to navigate an increasingly hardening insurance market characterized by higher rates in almost all lines. The coronavirus pandemic and natural catastrophe losses have only made matters worse.
Captive insurance companies came into existence because of difficult markets, like the one we’re experiencing now. They offer companies greater flexibility to retain risk and insurance/reinsurance options to manage a hard insurance market.
Our risk management, accounting, actuarial, and tax professionals work together to advise clients throughout every stage of the captive life cycle, from feasibility and formation to ongoing maintenance and enhancement. As needed, we also advise on captive closure considerations.
Insurance Consulting Solutions Leader, PwC US
Richard de Haan
Partner and Global Risk Modeling Services Leader, PwC US