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Old 05-17-2015, 01:29 AM
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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?)
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Old 05-17-2015, 11:12 AM
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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.
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Old 05-17-2015, 11:39 AM
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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.
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Old 05-17-2015, 01:29 PM
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Single Cell or group captive? Rent a Captive or Owned?
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Old 05-17-2015, 06:40 PM
Arlie_Proctor Arlie_Proctor is offline
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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.
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Old 05-20-2015, 05:53 PM
Jade Flamingo Jade Flamingo is offline
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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).
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