Draft your own insurance coverage: captives can often provide coverage for unique or specific risks that are not transferrable in the retail market.Through a captive strategy, improving risk management practices will directly impact the insured’s cost of insurance. A captive’s concern is sharply focused on one company as opposed to the entire industry, thereby allowing it to directly reflect that company’s efforts to lower insurance costs through better risk management. Moreover, a captive does not have to maintain higher average rates to ensure it can cover the losses associated with the high-risk members of its pool of insured. A captive insurer does not have the same operating expense structure, overhead, or profit requirements of a commercial carrier.
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Conversely, when premiums are established based exclusively on one organization’s loss experience, and that experience is better than the average experience in the market, the company will realize lower-than-average premium costs. If those efforts do not result in lower premium rates, then the insured believes there may be no economic reason to control losses. This is certainly true for any company working to lower costs through careful risk-management planning and practice.
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The parent identifies the risk of its subsidiaries that it wants the captive to underwrite.
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The captive is capitalized and domiciled in a jurisdiction with captive-enabling legislation which allows the captive to operate as a licensed insurer. There are additional benefits to creating a captive, but they should be ancillary to the primary purpose of risk management.Īt its most basic level a “pure” captive works like this: A corporation with one or more subsidiaries sets up a captive insurance company as a wholly owned subsidiary. A captive insurance company is a C-Corporation (or a legal entity taxed as a C-Corporation) created for the purpose of writing property and casualty insurance to a relatively small group of insureds.