WHAT IS A CAPTIVE?

A captive is an insurance company formed to insure or reinsure the risks of its parent corporation. In all, some 4,000 captives serve their parents’ risk financing needs around the world, and this number is growing steadily.

Captives generate $18 billion in annual premium world-wide. Their capital and surplus amount to $45 billion, and they control invested assets of more than $100 billion. Captive insurance and reinsurance companies are an integral part of the alternative risk transfer market, which accounts for approximately 30% of global commercial premium.

Below is a schematic example of a basic reinsurance captive program.

One of the functions of a captive is to facilitate the efficient financing of risk within an organization. Captive owners can be found in a wide range of areas, including multi-national corporations, associations, banks, municipalities, transportation companies, power producers, telecommunication companies, airlines, insurance companies, and so on.

A captive serves as a sophisticated in-house risk carrier. It can be used both as a weapon and a shield to control the upswings and downturns in the commercial market. A captive can bypass many of the problems and frictional costs inherent in the insurance industry. It can be an important co-ordination tool for risk managers. A captive forms part of the overall financial planning of a corporation or organization, and through the captive, risk management issues are brought to the attention of executive management.

A captive can operate as a direct insurance company, issuing policies to subsidiaries in a group, or it may serve as a reinsurance company, assuming risks behind commercial insurers. Captives traditionally underwrite property & casualty risks, but to an increasing extent are also involved in life assurance and employee benefit schemes.

For information on the features and benefits of captives, visit our Why Form a Captive? page.