From: Captive.com/IRMI
Captives are a key tool in the commercial insurance marketplace for addressing unique and complex risks. They offer an ideal solution for hard-to-insure risks or situations where coverage is difficult to obtain due to policy gaps, exclusions, or prohibitive costs through traditional insurance. Their adoption has only accelerated amid a hardening and volatile traditional market coupled with rising inflation.
A captive insurer is an insurance company wholly owned and controlled by its insureds. Its primary purpose is to insure its owners’ risks, allowing them to better manage exposures, control insurance costs, and potentially derive underwriting profits and tax benefits.
“The best candidates for forming a captive are organizations with a strong loss history and well-established risk management programs,” said Jim DeVoe-Talluto, assistant director of the captive insurance division at the Vermont Department of Financial Regulation. “Many organizations start their captives with higher frequency, predictable lines of coverage in which their loss experience may be stronger than their peers, but this favorable experience is not reflected in commercial quotes. Companies considering a captive may engage a qualified actuary to evaluate the feasibility and cost-effectiveness of a captive program.”
A captive operates by having its owner pay premiums to cover specific risks. The captive then underwrites policies, invests the premiums, and manages claims. Profits can be returned to the owner as dividends, reinvested to build surplus, used to reduce future premiums, expand coverage, or fund risk management initiatives that help mitigate future losses.
