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Corporations, large and growing companies seeking an alternative to buying insurance coverage through the insurance market sometimes consider a type of self-funded insurance called captives or cell captives as an insurance solution. Through our partnership with Artex Risk Solutions, Gallagher is able to offer specific clients the opportunity to use alternative risk solutions such as captives to cover certain businesses and risks.
What is captive insurance and how does it work?
Captive insurance is a form of self-insurance where a business forms its own insurance company to provide coverage for its own risks. A captive insurer is formed as a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies).
Captives are essentially a form of self-insurance where the insurer is owned wholly (or partly) by the insured, instead of obtaining insurance from a third-party insurance company.
The captive insurer is controlled by the parent company and is typically established to provide coverage for risks that are difficult or expensive to insure through traditional insurance channels.
What type of companies use captive insurance?
Captive insurance is primarily used by larger businesses with significant risk exposures and challenges in accessing optimal insurance solutions from the insurance market, who have the financial resources to support an insurance subsidiary as a dedicated business.
Captive insurance solutions are more likely to suit:
- large commercial organisations
- financial institutions
- growing middle market companies
- multi-national corporations.
Also certain industries are especially suited to group captives, such as transportation, warehousing, wholesale, distribution, food and beverage, and construction.
Why do companies consider captive insurance?
Captive insurance can provide a number of advantages to a parent company, and is often pursued because traditional insurance solutions are lacking — due to business risks that are difficult and sometimes impossible to get coverage for, and/or premiums that are excessively high.
Through a captive insurance model the company gains access to a self-designed solution to better manage risks and insurance needs, greater control over risk management, potential cost savings in insurance premiums and the ability to tailor insurance coverage to meet the specific needs of the parent business. As a self-insurance tool a captive, through the accumulation of premiums over time, creates a vehicle that effectively allows the spread of a financial risk over multiple profit and loss periods.
However, setting up a captive insurance company can also be complex and costly, and usually requires significant resources and expertise to manage effectively.
What are some examples of captive insurance structures?
There are many different types of captives, each designed to meet the specific needs of a parent business.
Single parent captives: This is the most common form of captive insurance, in which a single parent company creates its own captive to insure its own risks.
Group captives: A group of businesses come together to create a captive insurance company to insure their collective risks.
Protected cell captives: A captive insurance company is divided into individual cells, each of which operates as a separate legal entity with its own assets and liabilities.
These are just a few examples of the different types of captives that exist. The specific type of captive set up will depend on the unique needs and circumstances of the risks and parent company situation.
Interested in finding out more about a captive insurance arrangement?
Captive insurance can provide a useful alternative for some businesses with specialised needs and more than $1 million available for premium. With a range of options in structure and an involved process for arranging them, captive insurance arrangements are usually limited to specific areas of risk and best organised with the assistance of an experienced captives broker.
Our Artex captives experts can help business clients assess their needs, model the financials and offer suggestions. Some key topics to discuss include cost, budget, timeline and the potential for realising cost savings or other benefits.
