Captive insurance

Captive insurance is an insurer that a company or group creates to insure its own risks, rather than buying coverage from an outside carrier.

A parent company forms a licensed insurance subsidiary and directs premiums into it instead of to a commercial insurer; that captive then either retains the risk itself or lays some off to reinsurers. The parent sits as both the policyholder and, indirectly through ownership of the captive, the capital backing its own claims, so it keeps underwriting profit and claims data that would otherwise go to a third-party carrier.

The appeal is control: a captive lets an owner set its own terms for hard-to-place or highly specific risks, smooth volatile claims experience over time, and access reinsurance markets that are closed to individual buyers. The hard parts are capital and regulation — a captive still needs enough reserves to pay claims and must satisfy the domicile regulator that it is a real insurer, not a way to dodge tax or accounting rules, which is why formation and ongoing compliance are specialist work.

In insurtech, software increasingly handles the mechanics that used to justify a large consulting fee: captive formation and domicile selection, actuarial modeling of reserves, claims administration, and reporting to regulators, freeing captive managers to run more of them at once.

Written by Insurtech Daily.