Advantages and Disadvantages of Captive Insurance

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What is a captive?

“Captives are a form of alternative risk transfer. Commonly, they utilize a hybrid risk financing structure, meaning they both retain and transfer risk. A captive insurer is a subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates. Its primary purpose is to reduce the parent’s cost of risk” (Elliott, M. W., 2018).

“A single-parent captive (pure captive) is owned by one company that insures all or part of the loss exposures of that company or its subsidiaries. A group captive is a captive insurer owned by a group of companies, usually operating under similar businesses, rather than a single parent” (Elliott, M. W., 2018).

“To evaluate a captive insurance plan, a risk manager must understand its advantages and disadvantages.

Advantages

  • Reducing the cost of risk
  • Benefiting from cash flow
  • obtaining insurance not otherwise available
  • having direct access to reinsurers
  • negotiating with underwriters
  • centralizing loss retention
  • obtaining potential cash flow advantages on income taxes
  • controlling losses
  • obtaining rate equity

Disadvantages

  • Capital requirements and start-up costs
  • Sensitivity to losses
  • Pressure from parent company management
  • payment of premium taxes and residual market loadings” (Elliott, M. W., 2018).

References

Elliott, M. W. (2018). Risk Financing, 6th Edition. American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America.