Captive Insurance

What is Captive Insurance?

A captive insurance company is a licensed insurer formed primarily to underwrite the risks of its parent organization or affiliated group. Rather than purchasing commercial insurance and paying premiums to a third-party insurer, the parent establishes its own insurance subsidiary — the captive — which collects premiums, accumulates reserves, and pays claims arising from the parent's operations. The captive is a genuine licensed insurer, regulated in its domicile jurisdiction, but its policyholder base consists of the parent group rather than the general public.

The captive concept is well established: over 7,000 captives are licensed globally, concentrated in domiciles such as Bermuda, Cayman Islands, Vermont, Guernsey, and Luxembourg. Captive formation is most economical for organizations with large and diversifiable risk portfolios — typically those with annual insurance premiums exceeding £1m — where the discipline of formalizing risk financing delivers meaningful cost and information benefits.

Why Organizations Form Captives

The primary financial motivation is access to the reinsurance market. A captive can purchase reinsurance directly from reinsurers at rates typically lower than the combined cost of commercial primary insurance plus the primary insurer's profit loading. The captive also retains underwriting profit in years where losses are below expectation, building a reserve base that reduces future insurance costs. Over a multi-year horizon, a well-managed captive captures the insurance profit that would otherwise flow to external insurers.

Beyond cost, captives provide superior risk information and management discipline. Because the captive underwrites its parent's risks directly, the captive management team and board receive detailed loss data that would otherwise remain with commercial insurers. This information drives safety investment, claims management improvements, and more accurate internal pricing of risk across business units.

Types of Captive Structure

Single-parent (pure) captives are owned entirely by one corporate group and underwrite only group risks. Group captives are owned by multiple unrelated companies in the same industry who pool their risks collectively — common in sectors such as construction, healthcare, and retail. Rent-a-captive and protected cell company (PCC) structures allow organizations to access captive economics without forming a standalone licensed entity, by renting capacity in an existing captive structure while maintaining segregated assets and liabilities.

Captive Regulatory and Reporting Requirements

Captives are subject to full insurance regulation in their domicile, including minimum capital requirements, actuarial loss reserve certifications, annual financial statement filings, and regulatory examinations. The captive manager — typically a specialist firm providing governance, actuarial, and administrative services — must ensure that loss reserves are appropriately set, that premium transfers from the parent are correctly documented as arm's-length transactions, and that reinsurance arrangements (including any retrocessions) are properly structured. Robust documentation and audit trails are not optional: they protect the captive's tax treatment and its standing with the domicile regulator.