What is a Captive?

A captive insurance company was originally one which insured only the risks of its parent and sister companies as its main source of business. The term has since become used for any insurance company set up in a captive domicile, to take advantage of specific "captive" legislation. The different types of captive that are popular nowadays are:

Single Parent Captive (related risks)

This is an insurance or reinsurance company that only insures it's parent or affiliated companies.

Single Parent Captive (non related risks)

First party and third party risks are insured by the captive. Diversifying the business base to include the insurance of third party risks of customers and clients may change the captive from a cost center into a profit center.

Group Captive

This is an insurance company that insures or reinsures the risks of either a homogeneous or heterogeneous group of companies who may, or may not, be owners of the company. Risks are shared between all participants, and there may be a level of self retained losses using Class A (individual retentions) and Class B funds (shared retentions) within this sharing mechanism.

Association Captive

This is a company owned by a trade association and used to meet the insurance needs of its members.

Agency Captive

This is a company owned by an insurance agency which utilizes it to take risk in some of the business they place in the insurance market.

Rent-a-captive

A rent-a-captive is an arrangement in which a sponsor provides the capital for a captive company, which is then accessed by clients to write captive insurance business. The clients pay a charge to the sponsor for the 'rent' of the capital. Side arrangements, such as guarantees or letters of credit are used to ensure that the sponsor's capital is not placed at risk.

To some extent this type of arrangement has been replaced by the SPC. However, both rent-a-captives and SPC's are viable entities for agency captives and both have distinct advantages.

Segregated Portfolio Company "SPC"

This company is often known as the “Cell” captive and is set up with a “core” which usually doesn’t take risk and various segregated portfolio’s (cells) which assume individual risks. The assets and liabilities of each cell are segregated from each other. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participation agreement. This is a useful vehicle for those programs not large enough to set up their own captive or that do not wish to manage their own captive.

Risk Retention Group ("RRG")

In a number of US States it is possible form an insurance company (RRG) licenced under the Federal Risk Retention Act of 1981, as amended in 1986, which allows an insurance company licenced in one state to write business in all states without going through the full filing requirements to get licenced there. An RRG is owned by its insureds and can only write liability business.