Learn about the four categories of captives and how you would choose the right structure for your institution
What Is a Captive?
A captive is a licensed insurance company owned and operated by those it insures. Through a captive, organizations can enhance protection, customize policies, and benefit from any underwriting profits that would normally go to a third party.
Choosing the Right Type of Captive
Each type of captive comes with its own benefits and considerations. The type you (and your captive advisor) choose to implement will be based on your coverage needs, available capital, risk appetite, and legislative requirements.
A More In-Depth Look at the Four Categories of Captives
The four main categories of captive structures to consider are outlined below.
1. Group Captive
Multiple Owners, More Resilience
A group captive is owned by multiple companies that share uncontrolled risks (like natural disasters), liabilities, and profits to insure or reinsure the risk of the entire group.
Created by multiple members to benefit all members, a group captive can be homogeneous, meaning members are from the same industry, or heterogeneous, meaning members are from different industries. Each member’s premium is based upon its own loss experience – meaning it is a controllable amount.
Members of a group captive take part in the decision-making processes for items like underwriting, loss control, operations, re/insurance coverage options, and even risk management service providers. Because the cost is shared among all group members, operating expenses for group captives are typically lower than other captive types.
2. Single Parent Captive
One Owner. Customized Coverage.
By utilizing a single parent captive, there is no risk sharing or profit sharing with other entities, as the parent (owner) receives these benefits.
Single parent captives are owned by a single organization and only insure the risks of that organization (and/or chosen affiliated or unaffiliated companies). The customized coverage available allows organizations to underwrite any coverage that is:
- Insurable risk
- Actuarially rated
- Approved by the domicile
As an example, if a university chooses to utilize a single-parent captive, it may want to include a campus sandwich shop in the captive. The sandwich shop counts as an unaffiliated business.
3. Cell Captive
Captive Rental.
To put it simply: A cell captive is a captive formed by a third-party sponsor, which then “rents” cells to unrelated companies. Imagine an apartment complex. A company owns the building, takes care of the maintenance, and rents out units to people. That’s how a cell captive works.
Through a cell captive, the assets and liabilities of each cell are separate from one another. Each cell owner is typically required to capitalize its particular cells. However, a cell traditionally comes with lower start-up and frictional costs than single parent captives while still operating as its own single parent captive in respect to:
- Risks
- Funding
- Claims
- Financials
Cell structure means lower start-up costs and separate assets. The core is a single entity that contributes capital, holds the licenses, keeps the cells in compliance with regulatory approval, and manages relationships with key service providers, including regulators, to ensure cells meet all domicile requirements. A core is typically sponsored by an insurer, insurance broker, or agency.
A cell operates as its own single parent captive. It is a single entity with its own risk, premiums, insureds, and policies.