What is Captive Insurance?
Captive Insurance is another way to protect your organization against financial risk. With Captive Insurance, the ‘insurance company’ that provides coverage is owned by the insured.
That means that the insurer who owns the risk, also owns the insurance company who does the captive coverage.
This Insurance Company -created to create the captive insurance policy- is subjected to the same regulations as any other insurance company and needs to have Capital at Risk. “Capital at risk refers to the amount of capital set aside to cover risks. It applies to entities and people who are self-insured, as well as to insurance companies that underwrite insurance policies” according to Investopedia
At the same time, the insureds who own the insurance company must be sophisticated insureds. This means their net worth is enough to make decisions to buy an alternate risk financing program. Investopedia asserts that “An alternative risk financing facility is a type of private insurance created and funded by its customers to provide coverage tailored to their needs.”
According to Captive, Captive insurance’s “primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits”.
A Brief History of ‘Captives’ in Insurance
The definition of “Captive” dates back to the early 1950’s. At the term is attributed to Fred Reiss who created Steel Insurance Company of America for his client, Youngstown Sheet and Tube Company in Ohio. Youngstown was the owner of its mines, which they called “captive mines,” because they were used to mine ore for the company’s mills.
Reiss created Steel Insurance Company of America to write insurance solely for those mines, thereby calling it a “captive insurance company.” Reiss was the first person to realize that he could create a profit center from the cost of insurance. By 1960, there were more than 100 captive insurance companies in the United States writing insurance for their parent companies.
Captive Insurance vs Self Insurance
The main difference between self-insurance and captive insurance is that the provider of the captive insurance is the policyholder himself. He’s subjected to the same rules as any other insurance company but he can ‘customize’ his coverage as he sees fit.
A self-Insurance policy is most often used when an insured prefers to take on the risk himself because they can save money on premiums since an occurrence is thought to be remote. For example, an earthquake in an area that is not prone to earthquakes. Captive insurance is for people who need their assets insured because they operate outside of what commercial insurance can offer.
Captive from the International Risk Management Institute states that “When the products offered by insurers do not meet an insured’s risk financing needs, the best option might be to form a captive insurer.”
Types of Captive insurance
- Pure Captives: which means captive insurers are owned completely, directly, or indirectly by their insureds. They generally insure only the risk of their owner. Pure captives can be categorized as
- “Single-parent” Captives
- Group captives.
- Industrial Insured Group owned captives which are group owned and operate in the same industry.
- Heterogeneous groups are made up of multiple parties.
- Sponsored Captives: A sponsored captive is not formed by its insureds, who take on the role of ‘participants.’ Instead, a sponsored captive may be formed by an insurance industry related institution for the benefit of their clients. A sponsored captive does not necessarily pool the risks of its insureds.
The key difference between the pure captive and the sponsored captive is that a sponsored captive can be constituted to legally maintain separate underwriting accounts, while an insured in an owned captive shares the risk with other insureds.
What can captive insurance cover:
- Employee healthcare insurance and Workers’ compensation.
- Product and Professional liability.
- Cyber security and terrorism.
- Company-specific risks.
Terraclaim as a tool for Captive Insurance Claim Management
Even if it is your own risk you are attending via a captive, having claims processed and organized is a must. Terraclaim’s management module allows for a smart and easy processing of claims by giving the user the power of automations, smart reminders, and all the information about claim in an easy to read and access dashboard. Terraclaim also features a powerful report generator, that allows you to watch the history of your claims, most common claims submitted, and overall costs. See Terraclaim in action by requesting a demo here. Let wasted time be a thing of the past.