Captives
Captives Defined
Simply stated, a captive is an insurance company that insures the risks of its owner, affiliated businesses or a group of companies. It issues policies, collects premiums and pays claims. A captive is an insurance subsidiary formed by a company to insure or reinsure the risk of its owners. Often, captives are established to fill insurance coverage gaps where the conventional insurance market either cannot provide coverage, or where the cost is considered economically prohibitive. A captive insurance program is generally designed to provide the consistency of a stable insurance environment for a particular coverage or set of coverages. Sometimes a captive replaces part of a conventional insurance program and sometimes all of it.
History
Modern captives began in Bermuda in the early 1960s, and captive insurance was formalized in the late 1970s, with a medical malpractice captive for Harvard University. In the 1970s, many businesses had difficulty obtaining Products Liability Insurance, and as a result, the Products Liability Risk Retention Act of 1981 was passed into law. At the same time, strong interest was shown in establishing offshore captive insurance companies to write General Liability and Product Liability Coverage. In addition, the Liability Risk Retention Act of 1986 was passed, and encompassed all liability coverage, not just Product Liability.
Insurance industry trends indicate that many middle market businesses will implement a captive or alternative risk strategy over the next few years. In recent years, the growth of captive insurance and related risk transfer mechanisms has boomed, driven relentlessly by businesses seeking to better manage insurance needs, including cost, coverage, service, and capacity.
When segregated cells, risk retention groups, and rent-a-captives are included, the number of captive and alternative risk arrangements today are in the tens of thousands, and is rapidly growing. The market for alternative risks, including captives, is very large, far exceeding $100 billion of annual insurance premiums. It is estimated that there are over 5,000 captives today, with more being formed each week.
Currently, casualty coverages dominate the premium writings of captives; however, since 9/11, more property exposures have been or are being placed in captive insurance companies.
Statistics
- Over 5,000 world-wide
- Over 150 formed in 2006
- In 2009, estimated premiums written by captives were over $61 billion
- Approximately 50% of U.S. commercial lines business will be written in some form of captive
- Approximately 80% of all captives are pure (single-parent)