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What is a Captive?
A captive insurance company was originally a wholly owned subsidiary through which a parent or group insured or re-insured its own risk. The term was expanded to embrace mutual companies and those owned by groups of companies or associations usually operating in the same industry or profession. Captives are 'bona fide' insurance or reinsurance companies insuring or reinsuring the risks of their members and occasionally those of third parties.
There are several types of insurance captive, of which the most common are defined below:
Single Parent Captive - is an insurance or reinsurance company formed primarily to insure the risks of its non-insurance parent or affiliates.
Association Captive - is a company owned by a trade, industry or service group for the benefit of its members.
Group Captive - is a company, jointly owned by a number of companies, created to provide a vehicle to meet a common insurance need.
Agency Captive - is a company owned by an insurance agency or brokerage so they may reinsure a portion of the insurance they sell into their own company.
Rent-a-Captive - is a company that provides the captive facility to others for a fee, but protects itself from losses under their program. This facility is often used for programs that are too small to justify establishing their own captive.
Two other types of insurance company which have developed recently are special purpose vehicles ("SPV") and segregated portfolio companies ("SPC").
SPV - Although used extensively in the past for various financing arrangements, recently they have been used for catastrophe bond issues.
SPC - An exempted Class B insurance may establish as a "SPC" with segregated portfolios, such that the assets of one segregated portfolio, are not subject to the liabilities of another segregated portfolio. In effect, each segregated portfolio operates like a separate limited liability company, however it is actually a segregated section of a single legal entity.
