A captive is an insurance company whose main business purpose is
to insure the risks of its owners and affiliated companies. The
term ‘captive’ was first used in the 1950s by Fred Reiss, a US
property insurance engineer who was working for a client who
wanted to insure its coal mines. Reiss’ client could not afford
to pay the insurance premiums charged by insurers at that time
because they had increased substantially.
Reiss therefore came up with the idea of incorporating an
insurance company fully owned by the client whose sole purpose
was to insure the risks of its owner.
There are over 6,000 captives worldwide writing a total of more
than USD 60 billion of premiums annually. Companies also use
their captives as a tool to manage and control their risks.
We offer a range of captive formation and management services
across popular jurisdictions.
The main purpose of a feasibility study is to determine the
viability of forming and operating a captive. This will include
an analysis of the proposed retentions and retained coverages
and the production of the financial projections for the captive.
Management of incorporation and licensing process
Production of business plan
Liaison with the regulator and other third parties
Advantages of a captive
Lower insurance costs
Commercial insurance premiums include estimated claims as
well as broker commissions, marketing costs, underwriting
expenses, claim administration, general overhead expenses, and
insurance company profit. Using a captive, a company can
significantly reduce most of these expenses which represent
around 35% of commercial insurance premiums.
A captive will also have direct access to the reinsurance market
and will have additional negotiation power when renewing
existing insurance coverage with commercial insurers.
Retention of underwriting profits
Insuring risks with a captive generally leads to enhanced
risk management efforts and reduction in claims. To the extent
that actual claims are less than expected, the captive can
retain underwriting profits.
Insurance costs stability
Using a captive, a company can reduce its dependence on
commercial insurer whose pricing vary according to the hard and
soft market cycles.
Tailor-Made insurance solutions
A captive can provide insurance coverage for risks which may
otherwise be uninsurable or for which coverage may not be
available at reasonable costs.
Enhanced risk management
The presence of a captive generally creates incentives for
more proactive risk control and claims prevention. A company
will be able more effectively monitor its claims experience
using a captive.
Insurance premiums paid to a captive are treated the same as
insurance premiums paid to commercial insurers and can be
included as an expense in the company's income statement.
Risks a captive can insure
The traditional types of risk covered within a captive include
General / Third Party Liability
Directors & Officers Liability