What is a Captive?

“An insurance company that provides insurance to and is controlled by its owners or insureds”

Future of Captive Market

  • Growth in Alternative Markets Continues even with Softening insurance market
  • Roughly 5000 Captive facilities worldwide with steady growth in the past 20 years
  • Coastal Properties (Wind), Silica, Pollution, construction defect, and other uninsurable risks, continue to gain captive popularity


Types of Captives

Owned by or affiliated with the insured

  • Group Owned Captives
  • Single Owner Captives


  • Rental Captives
  • Segregated Cell Captives


Regardless of size, captive owners/insureds need:

  • Entrepreneurial spirit
  • Desire to take control
  • Financial ability to take risk – at least $250,000 per occurrence
  • Commitment to loss control and safety improvement


What is a Group Captive?

  • “A group of companies join together to form their own (re)insurance company.”
  • Members are both shareholders and policyholders.
  • Ideal premium size is from $300,000 to $2,000,000.


Group Reinsurance Structure


Company Structure


Premium Structure

Group Captive Pros/Cons


  • Partnering with Quality Business Owners
  • Captive Ownership/Increased Control
  • Underwriting Profit/Investment Income
  • Heightened Focus on Risk Management
  • Unbundled Claims


  • Potential for Assessments
  • Potential to Share Risk
  • Potentially Higher “Pay in Premium” than Traditional Market

Rental Captive Definition

An alternative risk financing vehicle where an insured “rents” a captive facility that provides the opportunity for underwriting profit and investment income, along with greater involvement in claims management and program structure.

Rental Captive Reinsurance Structure

Rental Captive Pros/Cons


  • Underwriting Profit/Investment Income
  • Reduced Operating Expenses (relative to Group Captive)
  • Less Governance Requirements
  • Opportunity to Grow and Maintain the same Program
  • Potentially No Risk Sharing with Other Companies


  • Less Control than Other Forms of Captives
  • Need Minimum Separate Sources of Risk
  • May Not be able to Unbundle Claims

Single Owner Captives

  • Set up to manage the risks of its owner
    • Captives that insure only the risks of the owner or the owner’s subsidiary operations are termed “pure” captives
  • Some single risk captives also provide coverage for other unrelated organizations
    • The source of the risk is the owner’s primary business activity
  • Financial results of captive will be consolidated with financial results of captive shareholder
  • Premiums to captive must be adequate to support captive operating costs and pay retained losses
    • Less than $1,000,000 becomes uneconomical
  • Can insure all lines, including traditionally uninsurable risks
  • Capitalization requirements based on domicile statute and amount of risk retained (on-shore vs. off-shore)
    • Adequate capital required to take risk
  • Must have enough separate sources of risk to meet IRS requirements for risk pooling – currently 7


Single Owner Pros/Cons


  • Underwriting Profit/Investment Income
  • Most Control
  • Increased Flexibility in Program Design
  • Unbundled Claims


  • Cost of Ongoing Operating Costs
  • Potentially Significant Amount of Capital Needed
  • Need Minimum Separate Sources of Risk



The Tax Acceleration Effect

  • Insured deducts premium as customary and normal business expense
    • Self insured deducts loss when paid
  • Premium insures losses that may be reported and paid in a future period
  • The insurer is allowed to deduct reserves from income
    • Discounted based on expected loss payout


Selecting the Type of Captive

  • How many separately incorporated entities do you have?
  • Do you want to deal with governance, have control over profit distributions?
  • Do you want to share risk with other companies?
  • Are you looking to transfer assets and liabilities into a non-consolidated entity?
  • Note that “size” and “expenses” are not key drivers, but type of risk may be.