Types of Captive Insurance Companies
In the previous article, we have studied about the concept of captive insurance companies. We have also enumerated the various advantages of using captive insurance companies over traditional insurance companies. However, there was an underlying assumption that all captive insurance companies are the same. That is not the case! There are various types of captive insurance companies in existence.
In this article, we will have a closer look at the different types of captive insurance companies that are present in the marketplace.
Single Parent Captive Companies: These are the most basic level of captive companies there are. As the definition suggests that these insurance companies are fully owned subsidiaries of their parent company. Also, the parent company along with other subsidiaries may be the only clients that a single parent captive company is allowed to have.
The contract between the captive and the parent company is not different from a standard insurance contract. It is just that both the companies actually belong to the same group. This means that there is no real transfer of risk which is taking place. In essence, the parent company is insuring its own risk and using the captive as a shield to obtain many tax advantages.
Affiliate Captive Companies
There are many laws governing the functioning of captive insurance companies as well. In many states, some of these laws do not allow a single parent company to sell insurance to its unrelated affiliates.
For instance, if a steel manufacturing company also has a chain of restaurants, some states will not allow the single parent captive to sell insurance to both. There is a different form of captive company that is allowed to serve both such companies.
The only difference between the affiliate captive and the single parent captive is the number of clients they serve. In all other respects, these companies can be considered to be identical.
Rent- A- Captive Insurance Company
The rent-a-captive alternative is usually used by smaller companies. Captive insurance companies offer many benefits. However, there are also a lot of costs to run an insurance company.
Firstly, licenses have to be obtained. Then rules have to be followed regarding how the capital is allocated once premiums are received.
Lastly, a lot of paperwork needs to be done to ensure that the captive company is compliant with the regulations that need to be followed. All of this obviously requires a lot of time and effort and also a lot of money needs to be spent.
This is where the rent-a-captive concept comes in handy. These are basically captive companies that are already in existence and have been created by insurance companies such as AIG, Liberty or Zurich. They take care of all the licensing, procedure and paperwork.
Clients just have to park their money as premium and withdraw it in the form of claims or dividends. Rent-a-captives provide services to multiple clients. However, every client faces only their own exposure. This means that the funds are not really being pooled but instead just being held by rent-a-captive companies.
Group captives are not pure captives. This is because when companies pay their premium into a group captive, they are pooling their funds with others. They are not really insuring only themselves. Instead, they are insuring a lot of other people who may have something in common.
For instance, some group captives provide insurance only to doctors. Others may provide insurance only to ambulance drivers and so on.
In such cases, any group can start a captive insurance company. However, as per law, it is necessary that the group must have been in existence for at least one year. Group insurance companies only accept premiums from members who are also shareholders. If a person is not a shareholder, they cannot be insured by group captives.
The problem with group captives is that people lose money because of the negligence of other members of the group. Hence, if anybody makes a claim, all members of the group have to pay out. In a poorly managed group, people who are prudent about their risk management eventually end up quitting the group.
On the other hand, the ones left in the group are those who would not get insurance anywhere else in the open market. Hence, the problem of adverse selection is built into these captive groups. When people have problems with captive insurance, they are usually referring to captive groups.
Risk Retention Groups
Risk retention groups are like captive groups with two important differences.
- Firstly, risk retention groups have to be registered under federal law. Hence, once they are incorporated in a given state, they are then allowed to continue with their business in the other 49 states
- Secondly, risk retention groups are allowed to sell insurance to people who are not shareholders. Who they can sell insurance to is determined by their bylaws. Hence, in many ways, risk retention groups function like regular insurance companies.
To sum it up, there are many types of captive insurance companies, and each serves a specific purpose.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Risk Management - Introduction
- Benefits of Risk Management
- Principles of Risk Management
- Risk Management Process
- Risk Identification and Assessment
- Aspects of Risk Management
- Steps in Risk Management Process
- Approaches to Risk Management
- Risk Management Policy
- Commonly Used Measures of Risk
- Risk Management Plan
- Evaluation of Risk Management Plan
- Risk Treatment
- Role of HRD in Risk Management
- Enterprise Risk Management
- Implementing ERM
- Risk Management and Stock Market
- Outsourcing Risk Management Program
- Risk Management as a Profession
- Anticipating and Mitigating Organizational Risks in the Digital Age
- Challenges Facing the Australian Economy
- The Economic Costs of MeToo
- Automated Claims Processing
- Challenges in Global Insurance And International Claims
- Conflicts of Interest in the Insurance Business
- The Cost Structure in the Insurance Industry
- How Drones Will Impact the Insurance Industry?
- How Is Health Insurance Funded?
- How Self Driving Cars Impact Insurance?
- How Stock Market Volatility Affects Insurance Companies?
- Insurance Agents vs. Insurance Brokers
- The ABCs of Insurance Fraud in India
- Technological Advances in the Insurance Industry
- The Basics of Unemployment Insurance
- The Pros and Cons of Unemployment Assistance and Why it Matters in the Present Times
- The Role of Insurance In #MeToo Movement
- Why the Flood Insurance Market should be Privatized?
- Basics of Pet Insurance
- Cannabis Insurance
- Challenges Facing Cryptocurrency Insurance
- Evolution of Insurance Regulation
- Food Delivery Apps and Insurance
- How Does Captive Insurance Work?
- On-Demand Insurance
- Reinsurance vs. Double Insurance
- Solvency Regulations in the Insurance Industry
- Terrorism and Insurance
- The Basics of Microinsurance
- The Basics of Reinsurance
- Types of Captive Insurance Companies
- What is P2P Insurance?
- How Risks Affect Companies Providing Financial Services
- Risk Management Information System
- Disadvantages of Risk Management Information Systems
- The Known-Unknown Classification of Risk
- Operational Risk: Definition and Drivers
- How Regulations Have Affected Operational Risk?
- Identification of Operational Risks
- How to Identify Operational Risks
- Using Internal Loss Data to Mitigate Operational Risks
- External Loss Data in Operational Risk Management
- Risk Control Self Assessment (RCSA)
- Scenario Analysis in Risk Management
- Key Risk Indicators
- Basel Approaches in Operational Risk Management
- The Basel Risk Categories
- Cause Categories in Operational Risk Management
- Loss Distribution Approach
- The COSO Framework for Internal Control
- Mistakes to be Avoided While Building a Risk Management System
- Credit Rating Terminology
- Types of Exposures to Determine Credit Limit
- Types of Credit Events
- Active Credit Portfolio Risk Management
- Metrics to Measure Credit Risk
- Credit Derivatives: An Introduction
- Credit Linked Note
- How do Credit Default Swaps Work?
- Why are Credit Default Swaps Dangerous?
- Total Returns Swap
- What are Collateralized Debt Obligations and How do they Work?
- Collateralized Debt Obligations: Advantages and Disadvantages
- Mark To Market Accounting
- What are Recovery Rates? - Different Types of Recovery Rates
- Netting, Close Out, and Acceleration
- Expected Default Frequency (EDF)
- Expected Default Frequency: Advantages and Disadvantages
- Altmans Z Score Model
- Unexpected Loss and Economic Capital Buffer
- Stress Testing in Credit Risk Management
- Provisioning in Credit Risk Management
- How Corporate Governance Impacts Credit Risk
- Exit Strategies In Credit Risk Management
- What is Market Risk? - How its Measured and Sources of Market Risk
- Why is Market Risk Management Important?
- Introduction to Value At Risk (VaR)
- The Three Types of Value at Risk (VaR)
- Marginal, Incremental and Component Value at Risk (VAR)
- How Value at Risk (VaR) is Implemented?
- Backtesting Value at Risk (VaR)
- Advantages of Using Value at Risk (VaR) Model
- Disadvantages of Using the Value at Risk (VaR) Model
- How Margins Are Calculated Using Value at Risk (VaR)
- Market Risk Limits
- Tail Risk
- The Upside of Market Volatility
- Relationship between Volatility and Risk
- Importance of Data Quality in Risk Management
- Impact of Using Poor Quality Data and Metrics to Measure Data Quality
- Enterprise Risk Management (ERM) vs Traditional Risk Management
- Benefits of Enterprise Risk Management
- Corporate Risk Governance
- International Risk Governance Committee (IRGC) Framework
- Failure of Market Risk Management
- Mistakes to Avoid in Risk Management