A feature article on the Risk and Insurance website reports that cell captives have become extremely popular self-insurance tools for companies of various sizes across all sectors, with cell legislation enacted in more than half of U.S. states and cell formations now outstripping stand-alone captive formations in many onshore and offshore captive domiciles.
In its simplest form, a captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies). Captives are established to meet the risk-management needs of the owners or members. They are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. Once established, the captive operates like any commercial insurer – i.e., it issues policies, collects premiums and pays claims, but it does not offer insurance to the public – and it is regulated as a captive, rather than as a traditional insurer.
The International Association of Insurance Commissioners (IAIS) defines a captive as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, other than an insurance or reinsurance group entity, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities, and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties.”
The type of entity forming a captive varies from a major multinational corporation to a nonprofit organization. Captives are held by the vast majority of Fortune 500 companies as an alternative method of risk financing (e.g., Gold Medal Insurance Co. was established by General Mills as a captive and Allstate was originally set up as a captive by Sears & Roebuck Co.). The industries with the greatest number of captives are finance, real estate, construction and manufacturing. Over the past several years, there has been particular growth in areas such as health care, property development and securitization for life insurers. A corporation that forms a captive will normally organize the captive as a subsidiary. Because few companies are in the business of insurance themselves, most captive parents will hire an outside firm, often an insurance company or captive manager, to manage the captive for them.
The captive concept took a while to catch on. It gained momentum in the mid-to-late 1980s during the hard commercial insurance market, when liability coverage was either unavailable or unaffordable for many buyers. Over the past three decades, there has been significant growth in the captive market. Today, there are more than 5,000 captives that do business around the world in a variety of industries, compared to roughly 1,000 in 1980. Almost 3,000 captives are domiciled in the Caribbean; 1,200 captives are domiciled in Europe and Asia; and more than 1,000 captives are domiciled in the United States.
Companies form captives to mitigate their exposure to a wide range of risks. Practically every risk underwritten by a commercial insurer can be provided by a captive. The majority of captives provide mainstream property/casualty insurance coverage such as general liability, product liability, workers’ compensation, director and officer (D&O) liability, auto liability and professional liability (e.g., medical malpractice).
Captives also provide specialized coverage for unusual or hard-to-insure risks (e.g., terrorism risk). Oil companies have used captives to gird against environmental claims related to infrequent but potentially high-cost events. Other types of nontraditional insurance coverage that a captive could underwrite includes credit risk, pollution liability, equipment maintenance warranty and employee benefit risks, including medical benefits, personal accident and, in some cases, whole life insurance.
Captive insurance structures can be classified into three main categories: Single Parent Captives, Group Captives, and Core Cell Captive Insurance Companies also known as Cell Captives or Core Cell Companies. Cell Captives are entities consisting of a core and an indefinite number of cell entities which are kept legally separate from each other. Each cell has dedicated assets and liabilities ascribed to it, and the assets of an individual cell cannot be used to meet the liabilities of any other cell.
Captive Resources L.L.C., a Schaumburg, Ill.-based captive consulting firm, saw nearly $100 million in new premiums last year for the 27 group captives that it advises, said Sandra Duncan, vice president of operations. The member-owned groups include 2,600 companies nationwide in a variety of industries, including manufacturing, distribution, trucking and agriculture. It estimates that the total member-owned group captive market represents $1.3 billion to $1.5 billion in written premiums – about 70% of which has come from companies that joined in the past decade. Recent interest in group captives has been driven by the improving economy, greater credit availability, and a hardening workers comp market, she said.