Traditional insurance is not right for every business. For companies that prefer to maintain more control over their insurance needs, there are captives. Captives refer to insurance companies that are both owned and controlled by insureds to insure the risks of the owners. In return, these companies can benefit from the captive insurer’s underwriting profits. Many businesses are turning to captives and for good reason. If you want to gain greater control over claims handling and reduce costs, captives can be an appealing option. However, not all captives are the same. It is important to understand the different types of captive insurers to ensure that this option is right for your business.
How Captive Insurance Works
Captive insurance companies operate in a similar manner as traditional insurance companies with a few exceptions. Like traditional insurance, captives issue policies, process claims, and follow all applicable regulations to adhere to state and federal laws. The biggest difference between the two is that with insured-owned captive insurance companies, the captive owner is able to choose whether or not to distribute or retain the company’s profits. This differs from a traditional insurance company in which the insurer and its shareholders retain the profits.
The Four Types of Captive Insurance
There are two main types of captive insurers. These include pure captives and sponsored captives. Pure captives refer to captive insurers that are 100 percent owned, whether directly or indirectly, by their insureds. What makes sponsored captives different is that they are both owned and controlled by parties that are unrelated to the insured. It is important to consider how both of these captive types, as well as group and sponsored captives, work to determine which will best benefit your business based on your unique needs.
Pure captives insure only the risks of its parent company or its related group companies. Also known as a single parent captive (SPC), this type of captive is most commonly used for larger entities. Pure captives are closely held insurance companies that insurance business is controlled by its owners and the original insureds are the principal beneficiaries. In a pure captive, the parent of the captive insurance company offers the capital used to form the captive. They also have direct involvement in all of the captive’s major operations, such as claims, underwriting, and investments.
The single parent captive is one of the most widely-used captives today. This is a type of insurance company that is owned by just one company, typically the insured. This type of captive is often used to provide some risk transfer or financing for corporations. Single parent captives may provide coverage directly or as reinsurance of a primary insurer. Traditionally, the single parent captive was designed for tax purposes. However, it is now used more frequently for coverage or limits that may be unavailable elsewhere. A single parent captive can help your organization stabilize pricing with more consistent premium costs. It can also reduce your insurance costs and save some of your operating funds for unexpected expenses.
A group captive is another common variation of a captive insurance company. As with any type of captive, the owners are the insured, which means they have most of the control in regard to the types of risks insured. The insured also have control over the decision-making process when it comes to underwriting, risk management and loss control. Group captives primarily exist to provide businesses with greater long-term cost stability than what traditional markets allow. Under a group captive, each member’s captive premium is based on that individual member’s loss experience.
Sponsored Captive Insurers
A sponsored captive is a type of single owner or group-owned rental captive that is most often formed as a segregated cell company. In some cases, the sponsor may have capital at risk but not always. In addition, the sponsor may have to be an insurance or reinsurance company. With a sponsored captive insurance company, the minimum capital and surplus that is required by law are provided by one or more of the sponsors. In addition, a sponsored captive funds its liability to each participant through one or more protected cells. Sponsored captive insurers may also be referred to as “non-affiliated” or “non-owned” captives and have many features similar to pure captives.
Reach Out to BenefitCorp for More Information
There are many reasons why modern businesses are choosing to create insurance captives. One of the most common reasons why captives are so appealing is that they have the ability to help companies achieve their risk financing objectives. However, these companies must also be willing to put their own capital at risk when establishing their insurance company. To learn more about the different types of captive insurers or for help getting started in the captive creation process, reach out to the insurance experts at BenefitCorp today.