Captive Insurance Companies: a Growing alternative method of risk financing

Journal of Payment Systems Law

PUBLISHED ON: September 5, 2007

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Growing numbers of publicly traded companies, large and mid-sized privately held corporations, tax exempt organizations, and other business entities are relying on captive
insurance companies to provide insurance and lower the costs associated with paying claims owed to third parties. Captives insure risks like those covered by general insurers, plus provide specialized coverage for, e.g., terrorism risks, all tailored to the risk/potential loss profile of an affiliated group of insureds. In essence, a captive
insurance company is an entity formed in a particular jurisdiction or domicile primarily to insure or reinsure the risks of the corporate parent and/or one or more other related entities, or even unrelated entities. So long as all of a captive’s actions are deemed prudent and within the scope of the law and usual insurance company practice, it can write almost any type of insurance coverage for related or unrelated entities and charge a premium that the company and its regulators find acceptable.

A captive can be owned by a corporation or by non-corporate entities, and can be domiciled on-shore or off-shore. Today, there are over 4,000 captive insurance companies around the world, nearly 1,500 of which are domiciled in Bermuda. Vermont, the largest U.S. domicile, has nearly 400 captives. A number of U.S. states are considering changes in their laws to encourage captives to be formed there and some U.S. states seek to specialize their captive legislation around certain types of coverage (e.g., medical malpractice).

All decisions regarding the operations of a captive are made by its board of directors, designated by the parent company. This ensures that the captive’s parent company maintains a level of control of the captive’s operations and permits the parent company to be as aggressive or conservative in risk underwriting as it desires, although it must be kept in mind that a captive, as an insurer, is fully subject to the laws and regulations of its domicile.