What is a Captive?

A captive is a small insurance company formed by an individual or a group of companies, for their own benefit. Instead of buying insurance from a traditional carrier, the captive buys reinsurance and returns excess premiums to the owner in the form of “Policyholder Dividends”. Investment Income also generates profit to the captive member in the form of “Shareholder Dividends”. Statutory policies are typically issued to each member just like in a traditional program, but unlike a traditional program, the captive member is in control and benefits from the profits. As of January 1, 2020, there were over 7,000 Captive Insurance companies worldwide and this number is constantly growing.

Workers’ Compensation, General Liability, and Employee Benefits are just some of the insurance lines frequently written in the captive marketplace. Captives currently generate over $65 Billion in annual premiums. Their capital and surplus exceeds $225 Billion. Captive insurance and reinsurance are an integral part of the “alternative risk market” which accounts for more than 35% of all commercial insurance premiums.

Captive Insurance owners can be found in any variety of industries, including: Manufacturers, Retailers, Wholesalers, Associations, Transportation, Service Companies, Municipalities, and so on. “Single Parent Captives” contain only one large company. “Group Captives” are generally comprised of small to medium sized companies and can be of like industries or can combine several types of companies, effectively diversifying the risk.

A captive insurance company serves to help control and smooth out the upward and downward cycles of the insurance market. In a hard market, a captive can provide a safe haven from increasing premiums and diminishing service. Most importantly, a captive gives the owner unique control over their insurance program. A captive can be a superior risk management tool and play an important part of a business’s overall financial plan.