Actuarial Outpost
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Property - Casualty / General Insurance
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

DW Simpson Global Actuarial & Analytics Recruitment
Download our Actuarial Salary Survey
now with state-by-state salary information!

Thread Tools Search this Thread Display Modes
Old 05-17-2015, 01:29 AM
jlgray189's Avatar
jlgray189 jlgray189 is offline
SOA Non-Actuary
Join Date: Apr 2014
Studying for MFE
Posts: 269
Default What is Captive Insurance?

What is captive insurance? The impression I get is that a company wants to basically make their own mini insurance company just for their company in particular to cover a particular type of risk.

I heard Vermont is the number one state for captive insurance in the US. I guess I am a bit surprised because it does not seem like there is much of an insurance "presence" in VT, besides a couple of insurance companies. So, I'm assuming captives are filed as a business but are really just big funds of money? (where they came up with how much to deposit based on actuarial projections?)
1/P 2/FM 3F/MFE 3C+ST/MLC 4/C
Reply With Quote
Old 05-17-2015, 11:12 AM
Westley Westley is offline
Join Date: Nov 2001
Posts: 30,542

It's a complicated topic, so "What is captive insurance?" is too broad to get much of an answer I think. As far as you've gone, your answers are correct - the captive insurance companies in Vermont (or most other place, including offshore) are usually just a PO Box operated by a broker or similar, and are operated out of the home office of whomever formed the captive.

I always wondered why companies did this (still believe that most companies that form them are doing something that they were sold into, but doesn't really make sense for them) - sometimes they want to retain a risk that they cannot simply retain on their balance sheet (for example, workers comp in many areas has rules that make this difficult/impossible). Sometimes they want to be able to access reinsurance markets for certain layers. They may simply want the risk off their balance sheet because investors don't like it. There's other reasons too.
Reply With Quote
Old 05-17-2015, 11:39 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 93,065
Blog Entries: 6

A legit use is that a non-insurance company wants to self-insure and get the various benefits of an insurance company (taxation, etc)

Insurance companies also have captives, but they're using them for something entirely different.

LinkedIn Profile
Reply With Quote
Old 05-17-2015, 01:29 PM
silverfox's Avatar
silverfox silverfox is offline
Join Date: May 2005
Favorite beer: Westmalle Tripel
Posts: 14,863

Single Cell or group captive? Rent a Captive or Owned?
Reply With Quote
Old 05-17-2015, 06:40 PM
Arlie_Proctor Arlie_Proctor is offline
Join Date: Dec 2001
Location: N.J.
College: Indiana University
Favorite beer: Becks
Posts: 1,203

One common use for captive reinsurance companies is to allow Managing General Agents/Underwriters to share in the risks they are producing. It helps provide evidence that the producer has "skin in the game" and cares about the underwriting results.

In theory, a captive insurance company allows the risk manager of a large corporation to simultaneously provide proof of insurance where needed, access the reinsurance market to stabilize annual costs, and at the same time reduce the transactional costs associated with purchasing insurance on the open market (commissions and overhead). In practice, some succeed and some do not. It takes a fairly large premium volume to pay for the costs of doing business as an insurance company and simultaneously show a savings in transactional costs versus the traditional model.
Reply With Quote
Old 05-20-2015, 05:53 PM
Jade Flamingo Jade Flamingo is offline
Join Date: Jun 2014
Location: New York
Studying for Life Pricing
Posts: 76

Risk Management textbooks will quote the strategic benefits of having more control on your insurance program and having a bargaining chip against insurer during renewal. It is indeed the true motivation behind many captives. However, many captives in reality come down to tax deduction - premium paid to the captive is immediately tax deductible expense, subject to some organization structuring (buzz words Risk Shifting & Risk Distribution). Some family businesses use it to pile cash (not advisable). Some insurance companies use it for capital relief (eg. variable annuity).
Reply With Quote

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

All times are GMT -4. The time now is 09:08 AM.

Powered by vBulletin®
Copyright ©2000 - 2020, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.36461 seconds with 11 queries