A “captive” is an insurance company created to insure the risks of its owner(s). Captives are a form of self-insurance established to meet the risk management needs of the owners or members. Group captives or risk retention groups insure the risks of unrelated entities.
Captives are formed to cover a wide range of risks, including most casualty exposure, property, terrorism, cyber, and even international employee benefits. Risks can be first party or third party, and companies are becoming more creative in how they utilize their captive programs.
The types of entities forming captives include the vast majority of Fortune 500 companies, all the way down to nonprofit organizations. Captive utilization spans most market sectors including automotive, telecoms, technology, retail, manufacturing, healthcare, pharma, oil and gas and even TNCs.
The benefits of forming a captive include flexibility for tailored coverage (hard to insure or emerging risks), insulation to the insurance market cycle, financial incentives in loss control, niche business risk knowledge, flexibility in managing risk, creative insurance solutions, cost allocations to business units, and consolidation of risk management.
Once established, the captive operates like a commercial insurance company and is subject to state regulatory requirements (albeit less onerous ones than the traditional market), including financial reporting, capital/ solvency support, and reserve adequacy including an annual actuarial opinion.
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 what we’re experiencing right now. They offer companies greater flexibility and options in a hard insurance market.
Captives have helped support parents during the COVID-19 crisis by providing them needed cash through dividends. In addition, domiciles have supported some captives entering into intercompany investments as another way to get capital to parents.
US Insurance Practice Leader, PwC US