Captive Insurance

Why form a Captive?

Reduced insurance costs - Captive insurance programmes should be cheaper to operate than traditional ones. A captive enables a group of companies to avoid incurring the substantial administration costs of a commercial insurer such as marketing, advertising and distribution expenses. This results in lower premiums for the same insurance coverage.

Direct access to the reinsurance market - A captive has direct access to the reinsurance market where reinsurers tend to work on lower expense ratios than direct insurers. It may also obtain the benefit of professional advice from reinsurers on risk management and related matters. Thus direct access to the lower cost reinsurance market opens up possibilities for risk financing which may not be available otherwise. Ceding and profit commissions may be earned to further reduce the net insurance costs.

Insurance of hard-to-place risks - Certain types of risks such as hazardous materials and selected professional indemnity are either not available at all in the direct insurance market or only available at unacceptably high premiums. Forming a captive may be the only way to absorb such risks as it will have access to reinsurance market which is more flexible and accommodating.

Better risk management - Better control can be exercised on risk management functions such as loss control, safety instructions, loss spreading etc.

Increased cash flow - Insurance premiums paid by a company to a commercial insurer are usually paid at the commencement of the underwriting period. A captive, however, does not necessarily follow this timing in collecting premiums and paying them over to the reinsurers. Premiums paid to reinsurers are usually paid in arrears and therefore there may well be immediate cash flow benefits.

Centralized insurance management - A captive can serve as a central point to simplify, coordinate and control worldwide risk management. Insurance and reinsurance coverage can be tailored to meet the specific needs of the parent company.