Types of Captive Insurance Options

Captive insurance options can be tailored to meet the specific needs of a business.

A single-parent captive is a type of captive insurance option that allows a single company to insure its own risks.

A group captive is a type of captive insurance option that allows multiple companies to share risks and premiums.

A sponsored captive is a type of captive insurance option that is sponsored by an insurance company or a third-party administrator.

A protected cell captive is a type of captive insurance option that allows multiple cells to be created within a single captive insurance company.

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Protected Cell Companies (PCCs) offer a way to segregate accounts, making each one legally protected from liabilities of other accounts within the captive.

PCCs can be used with a rent-a-captive to protect participants from the adverse experience of other participants, limiting risk-sharing without forming their own captive.

The need to coordinate matters among multiple owners is a potential disadvantage of PCCs, depending on the domicile. Uncertain tax status of individual cells is another potential drawback.

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Single-owner captives are a type of captive insurance company that's set up and operated by a single owner to insure its own risks and the risks of its subsidiaries and affiliates.

These captives often provide coverage for other, non-related organizations, making them a versatile risk management solution.

Single-owner captives that only insure the risks of the owner or the owner's subsidiary operations are termed "pure" captives.

A key characteristic of single-owner captives is that they're closely held insurance companies, with the owner having direct involvement in all major operations, such as claims, underwriting, and investments.

The owner also provides the capital used to form the captive, giving them a high level of control over the company's operations.

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A multi-owner captive is a type of captive insurance company that is owned by multiple unrelated companies or entities, often with a common business interest or goal.

This structure allows for shared risk management and cost savings among the owners, who can pool their resources to create a larger and more stable captive.

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Each owner typically contributes a portion of the premium to the captive, which is then used to cover losses and pay claims.

A key benefit of a multi-owner captive is its ability to provide a higher level of risk management and financial stability than a single-owner captive.

This is because the shared ownership structure allows the captive to spread its risk across multiple entities, reducing the financial impact of any one loss.

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A protected cell captive insurance company is a type of captive insurance company that enables multiple insureds or participants to share the benefits and risks of a single insurance policy.

This structure separates the assets and liabilities of each participant, creating individual "cells" within the company, and allows participants to enjoy the advantages of a captive insurance company while limiting their exposure to the risks of other participants.

Cost efficiency is a significant advantage of protected cell captive insurance companies, with shared costs of operating the company being lower than establishing individual captive insurance companies.

Customization is also a key benefit, as participants can tailor their insurance coverage to suit their needs and risk profiles.

The assets of each cell are protected from the liabilities of other cells and the core company, providing a higher level of asset protection.

However, managing a protected cell captive insurance company can be complex, requiring careful management and implementation, as well as compliance with relevant insurance regulations and reporting requirements in each jurisdiction.

The stability and continuity of the protected cell captive insurance company depend on the financial strength and capabilities of the core company.

Protected cell captive insurance companies can be used with a rent-a-captive to protect a participant in varying degrees, depending on the jurisdiction and the nature of the corporate agreements among the shareholders and cell members.

One potential disadvantage of PCCs is the need to coordinate matters among multiple owners, which can be challenging.

A Risk Retention Group, or RRG, is an insurance company created by businesses or individuals with similar risks who come together to self-insure against these risks.

RRGs are formed under the provisions of the Federal Liability Risk Retention Act (LRRA) of 1986 in the United States.

These groups are exempt from certain state regulations and are allowed to provide liability coverage to their members, including professional liability, general liability, product liability, and more.

RRGs offer businesses and individuals the opportunity to self-insure against specific risks, providing increased control over insurance needs and flexibility in coverage.

Members can tailor their policies to meet their specific risk management needs, eliminating the need for profits required by traditional insurance companies.

RRGs also provide cost savings, as members contribute premiums directly used to pay claims.

However, RRGs must meet strict requirements to qualify under the LRRA, including demonstrating financial stability, implementing proper risk management practices, and complying with state reporting and financial requirements.

RRGs may also face limitations regarding the types of coverage they can provide and the states where they can operate, as not all states recognize the LRRA.

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Special purpose captives are a catchall category that covers all remaining captives not defined by other statutes. They're usually owned or controlled by a parent company and may only insure the risk of its parent or its economic family.

These captives are often used to manage the risks of a specific group of companies, rather than a single entity.

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Micro Captives are used by midsize companies looking for cost-effective ways to transfer risk, and over 90 percent of Fortune 1000 companies and many successful middle market businesses have captives.

Over half of all property and casualty premiums that are written, are written through captives. This is a significant advantage for middle market companies.

A Section 831(b) or "small" property/casualty captive, also known as a "micro-captive", introduces middle market companies to alternative risk transfer and its benefits. This provides a valuable cost-saving tool for this class of insurance buyers.

During the early 2010s, the Section 831(b) captive or "small" property and casualty captive insurance became a popular choice for middle market companies. This led to a proliferation of captive insurance as an illegal tax shelter.

Bermuda is the world's leading offshore captive domicile, with 958 captives licensed as of 2008. This is likely due to its geographical location, clean reputation, and status as a British Dependent Territory.

The Cayman Islands is the second largest licensing jurisdiction in terms of the number of captives licensed, with 765 captives licensed as of 2008. Vermont, in the United States, is second in terms of insurance company assets but third in terms of captives licensed.

Some European captives ask for simplified regulation, likely due to the new set of regulatory requirements (Solvency II) planned for the EU. Premiums paid to captives are tax deductible, provided the terms of the policy (including the premium amount) are reasonable.

Here are the top captive domiciles, based on the number of captives licensed:

Bermuda is the world's leading offshore captive domicile, with 958 captives licensed as of 2008.

The Cayman Islands is the second largest licensing jurisdiction, with 765 captives licensed in the same year.

Vermont is a notable onshore domicile, with 567 captives licensed as of 2008.

Guernsey, Luxembourg, and Barbados also have a significant number of captives, with 368, 262, and 256 licensed respectively.

Here is a breakdown of the top domiciles:

Delaware and Ireland also have a notable number of captives, with 251 and 224 licensed respectively.

In the US, workers' compensation business must initially be written by another insurer, which then reinsures it to the captive, retaining a fee between 5% and 15%.

Premiums paid to captives are tax deductible, provided the terms of the policy are reasonable.

A captive cannot arbitrarily set the premium amount to generate a deduction for the parent, and must be able to demonstrate its premium generating process (underwriting).

In the European Union, a new set of regulatory requirements (Solvency II) is planned with additional restrictions and responsibilities for captives and reinsurance companies.

Some European captives ask for simplified regulation, suggesting that the current requirements may be overly complex.