Captive insurance companies may be defined as limited-purpose insurance companies that were established with the sole purpose of financing risks emanating from their parent group or groups. This definition is sometimes extended to include risks from the parent companies’ customers.
Captive insurance companies are basically in-house self-insurance vehicles. They may take the form of a “pure” entity, a “mutual” captive, or an “association” captive.
Captive insurance companies represent commercial, economic, and tax advantages for their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for the cash flows they generate. Additionally, they may also provide coverage for risks that are neither available or offered in the traditional insurance market at similar reasonable prices.
The types of risk that a captive insurance company can underwrite for their parent companies include property damage, public and product liability, professional indemnity, employee benefits, employers’ liability, and motor and medical expenses. The captive insurance company’s exposure to these risks may be managed and limited by the use of reinsurance. Captives have become an increasingly more important component of the risk management and financing strategy for their parent companies.