Here’s how captive insurance gives companies a structured and regulated way to essentially self-insure their risks:
- Formalized Self-Insurance:
- Instead of Outsourcing: Rather than relying entirely on external insurers, the company creates its own dedicated insurance subsidiary.
- Control of Premiums: The company pays premiums to its captive insurer, keeping those funds within its overarching corporate structure rather than giving them to an outsider.
- Managing Risk Pools:
- Owning the Risk: The captive assumes responsibility for insuring the company’s (or group’s) defined risks.
- Accumulating Funds: Premiums create a pool of money designated to cover potential claims.
- Underwriting Discipline: The company gains greater awareness and incentives to minimize the very risks it’s insuring.
- Potential Benefits Over Traditional Insurance:
- Customized Coverage: The captive can provide policies directly matching the parent company’s specific needs, unlike standard off-the-shelf choices.
- Potential Cost Savings: If the captive is well-managed and claims are lower than what traditional premiums would have been, the company saves money.
- Access to Reinsurance: Captives can still buy reinsurance for catastrophic losses, further spreading the risk and adding a safety net.
- Not Pure Self-Insurance:
- Regulatory Oversight: Captives are licensed and regulated insurance entities, unlike informal self-insurance reserves. This offers some protections.
- Professional Management: While it’s “self”-insurance, captives are often run by specialized management firms to ensure proper underwriting and compliance.
Why Choose the Captive Route?
- When traditional insurance is too expensive or offers limited coverage for the company’s specific risks.
- For large companies or groups of businesses where there’s the potential for cost savings over time due to good risk management.