Choosing the Right Insurance: How Does Captive Insurance Work?


Companies want to know all their options before making a decision. If you aren’t familiar with the term captive insurance you might wonder, “How does captive insurance work?”

Even those in the business world could struggle to understand captive insurance. Insurance companies have been around for centuries. The industry is growing to this day, but what makes captive insurance so appealing?

Companies choose this type of insurance in specific situations. Picking captive insurance comes with the weighing of options.

Let’s find out what your options are.

Define Captive Insurance

Captive insurance is defined as an insurance company that is owned and controlled by the insured.

This type of insurance provides a risk-mitigation service. Risk mitigation helps individuals prepare for and lessen the threats of negative outcomes.

These types of companies are formed to help supplement commercial insurance. By doing this the companies can retain the money that would be shelled out on insurance premiums.

How Does Captive Insurance Work?

Understanding captive insurance takes situational experience, but it’s not hard to grasp.

This process puts the insured’s capital at risk during the creation of their own insurance company. Captive insurance works without the influence of commercial insurance marketplaces. This is a premeditated decision by the insured.

If things go smoothly, the insured will receive whatever risk financing objectives they set in place. If the insured decides to purchase captive insurance they’re prepared to invest their own resources.

In the long run, the insured will benefit from having control of the company and its profitability down the road.

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Pure or Sponsored Captives

There are two types of captive insurers; pure captives and sponsored captives.

Pure captive insurers are 100 percent owned by the insured either directly or indirectly. This could be a single-parent or group captive to help manage risk.

Sponsored captives are owned by captives and controlled by those that are unrelated to the insured. The sponsor ends up contributing to the captive’s statutory capital or core capitals.

Know Practicality

There are a few reasons captive insurance companies form.

It could be the inability to obtain insurance coverage need, hardening of premiums, or less expensive coverage opportunities. In the end, companies that are chosen captive insurance want more control over the current insurance programs.

Under captive insurance, a captive can change a business and in the same breath serve the community. In an extreme case, captive insurance is used to help cover the losses commercial coverage cannot.

Shielding the company from costs that aren’t covered limits risk. Captive insurance is practical in this setting.

If you want to know more about its practicality in your situation, click here.

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