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Why a Captive or Cell can be a Viable Part of your Risk Structure

As the traditional commercial insurance marketplace continues to harden, captive insurance solutions can be a viable risk solution for businesses of all sizes. Learn more about captive options for your organization.

As increased pricing, reduced capacity and tighter terms and conditions continue to impact the traditional risk transfer marketplace, risk managers facing limited risk budgets have several options:

  • Pay the higher commercial premiums
  • Assume the risk at the parent level and self-finance on the corporate balance sheet
  • Transfer the risk to a captive as they seek to manage their total cost of risk.

Many innovative risk managers are increasingly turning to alternative risk solutions, including captives/cells to, among other things, shield their parent organization from the volatility in the traditional insurance market, reduce the cost of capital, gain direct access to reinsurers, gain greater control over claims, and achieve some independence from insurers. While captives/cells are not a solution for every type of risk, they can provide a sense of certainty and relief for insurance buyers in a volatile risk transfer market.


Captive/Cell Background

A captive or cell functions like a traditional commercial insurer, but is owned by a non-insurance company parent, which primarily insures or reinsures the risks of its parent and/or affiliated companies. A captive:

  • Issues policies to policyholders
  • Collects premiums
  • Disburses claim payments
  • Prepares financial statements
  • Complies with regulatory requirements in the jurisdiction in which it is domiciled

Captives can write many lines of business, including property, business interruption, general liability, excess liability, workers’ compensation, auto liability, medical malpractice and other trending risks, including cyber, extended warranty, employment practices liability and more.


Captive Insurance Structures

Single Parent Captive: The most common captive option is where the parent company controls all of the operations of the captive. Single Parent Captives are wholly owned by a single entity to insure or reinsure the risks of the parent and related companies in the group.

Group Captive: A captive insurance company that insures the risks of a group of unrelated insureds. The risks can be heterogeneous or homogenous or are often organized by members of a common industry or trade association. Most Group Captives provide a limited range of coverages and are generally used for workers’ compensation, general liability and auto liability. Attractive group captive candidates are typically best-in-class companies, with good loss and safety history and long-term financial stability.

Segregated Account/Protected Cell: This structure is established and operated by an outside organization with insureds using a cell, or portion, of the facility. It provides many of the benefits of a single-parent captive, with increased speed to formation and lower costs of doing business. These arrangements are suitable for companies across sizes and industries.


Determining if Your Company is a Candidate for a Captive

The formation of a captive begins with a captive feasibility study. To determine if your company is an attractive candidate for a captive, consider the following:

Premium Volume: There needs to be a critical mass in annual premiums to justify the considerable frictional costs in forming a captive. While situations vary, annual gross premiums of at least of $1.5 million for any class of risk can be used as a benchmark.

Positive Loss Ratio: A strong recent loss history speaks well for the organization’s positive risk management results. In addition, loss ratios are a quick test of whether the organization could have taken advantage of increased self-retention.

Premium/Risk Distribution: A company with only one exposure is not likely to be a captive candidate. However, organizations with many insurable assets in different parts of the country/world can capitalize on the organization’s lowered volatility in its risk profile.

Long-term Commitment: Companies looking to form a captive need the support of top management and a commitment to active mitigation of risk at all levels of the organization. Successful captive candidates understand that operating a captive is a long-term play rather than a one-year quick fix and that there is a capital commitment commensurate with the risk retained.

[1] NAIC. Captive Insurance Companies

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The information contained herein and the statements expressed are of a general nature and may not apply to particular factual or legal circumstances. The materials do not constitute legal advice or opinions and should not be relied upon as such. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.