By Shaun Geils, Global Head of Insurance
Captive insurance is a specialised form of self-insurance that allows businesses to create their own insurance company to cover specific types of risk. The captive insurance industry is projected to reach a global market value of $250 billion by 2028, reflecting the growing need for alternative coverage and cost reduction worldwide.
Captives offer businesses greater control, lower costs, and more bespoke coverage options than traditional insurers. In this article, we’ll explain the basics of captive insurance, including how it works, why businesses use it, and how it differs from traditional insurance models.
What is meant by captive insurance?
In simple terms, captive insurance refers to the practice of establishing an insurance company that is owned and controlled by the business it insures. Rather than purchasing coverage from an external provider, businesses establish a “captive” insurance company to underwrite their risks.
Companies often turn to captive insurance when traditional policies no longer provide adequate or cost-effective coverage. Their purpose is to cover losses while providing more control over risks and how those losses are managed. Captive insurers can cover a wide range of risks, including property, liability, and even employee benefits. Because they own the captive, businesses can directly influence insurance underwriting, claims management, and investment strategies.
How captive insurance works
Captive insurance companies operate much like a traditional insurer, but with a key distinction: in traditional cases, such as pure captives, they only insure risks for their parent company or its affiliates.
Here’s how it works:
- Formation: A business or group establishes a captive insurance company, often in a favourable jurisdiction
- Premium collection: The business pays premiums to the captive insurer, just as it would to a traditional carrier
- Claims: When a covered event occurs, the captive insurer pays out claims. Because the insured business owns the captive, there’s more flexibility in how claims are managed
- Reserves and investments: Captives build reserves from collected premiums, which can be invested to generate additional revenue and enhanced cash flow
- Reinsurance: Captives can purchase reinsurance to distribute some of the risk (i.e., covering catastrophic losses), thereby protecting themselves from significant financial exposure
The advantages of captive insurance
Captive insurance provides a range of significant benefits, making it an attractive choice for businesses looking to strategically manage risk while reducing costs.
Bespoke coverage
Reduced operating costs
Greater cash flow
Tax benefits
What is the difference between captive and independent insurance?
The primary difference between captive and independent insurance lies in its ownership. Captive insurance is created and controlled by the insured business and provides coverage exclusively to its parent company or related entities. By contrast, independent insurance involves purchasing policies from third-party insurers that operate as separate entities.
Captive insurance offers more control over coverage, pricing, and claims, while independent insurance sidesteps the administrative and governance complexities of managing an insurance company. The best choice depends on a company’s size, risk profile, and strategic objectives.
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