Captive Insurance: Self-Insuring for Corporate Risk Management

**Captive Insurance** is a form of **self-insurance** where a corporation or group of corporations creates its own, full-fledged insurance company to insure the risks of the parent company. While highly complex, this strategy is a key tool in **Corporate Risk Management** for large entities seeking greater control, cost savings, and access to the reinsurance market (Article 30).

How a Captive Works

The parent company pays premiums to its own captive insurance subsidiary. The captive then uses those premiums to pay the parent company’s claims. Any underwriting profit (premiums minus claims and expenses) remains within the corporate structure, unlike traditional insurance, where the profit goes to the external carrier.

Primary Motivations for Creating a Captive:

**Access to Reinsurance:** Captives can directly access the global reinsurance market, often securing better pricing than they could through standard retail channels.
**Coverage for Unique Risks:** A captive can be designed to cover risks that commercial insurers refuse to cover or price prohibitively (e.g., specific regulatory changes, or unique supply chain risks).
**Cash Flow Control:** Premiums and reserves stay within the corporation until claims are paid, offering better control over capital.

Types of Captives

Captives can be single-parent (owned by one corporation) or group/association captives (owned by members of an industry). This strategy falls under the umbrella of **Alternative Risk Transfer**.

Regulatory and Tax Note: Captives are heavily regulated and often domiciled in favorable jurisdictions (like Bermuda or the Cayman Islands) to meet capital requirements and benefit from specific tax treatments.

**Captive Insurance** is an advanced, powerful mechanism used by sophisticated organizations to customize coverage and manage risk with strategic financial discipline.