What is a captive insurer?
A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent or a number of similar corporations (e.g., trade associations) thereby contributing to a reduction in its parent's total cost of risk.
- An alternative method of managing and financing risk
- The most flexible and aggressive form of self-insurance
Why form a captive?
- Lower insurance and reinsurance costs
- Increased profits and cash flow
- Increased availability of coverage
- Custom tailored coverage
- Direct access to reinsurance market
- Improved risk management, loss control and prevention
- Favorable loss experience rewarded
- Cost control
- Possible tax deferral or reduction
What are potential disadvantages?
- Increased regulation (compared to other forms of self insurance)
- Unfavorable loss development
- Cost (capital, frictional)