The What, Why and How of Captives


  • Historically, there is strong evidence indicating that the first captive organized in the United States was the Mutual Assurance Company of the City of Norwich, formed in Norwich, Connecticut in 1795 by textile manufacturers seeking an alternative to the traditional insurance market.
  • The first modern captive was the Mahoning Insurance Company, established by the Youngstown Sheet & Tube Company in 1957.
  • Until the late 1990's, captives were mostly utilized by large industrial companies.
  • As a result of the development of cell and sponsored captive insurance companies in the early 2000's, captives have become more accessible to middle market companies and the captive market has grown substantially.
  • As of 2012, there are approximately 6,660 captives worldwide, writing an estimated $90-$95 billion in premium. In the U.S., there are approximately 1,960 captives writing an estimated $42-$43 billion in premium. (Statistics courtesy of Captive Review)
  • Premiums written by captives represent approximately 30% of all commercial lines premiums.
  • * Most popular coverages written by captives:
    • Property
    • General/third party liability
    • Employers' liability/workers' compensation
    • Professional indemnity
    • Automobile liability
  • * Top 10 ranking of captive utilization by industry:
    • Financial institutions
    • Health care
    • Retail and consumer products
    • Manufacturing
    • Power and utilities
    • Construction
    • Transportation
    • Communications, media and technology
    • Chemicals
    • Mining, metals and minerals
*Information courtesy of Marsh's 2012 Captive Benchmarking Report

  • Essentially, formalized self-insurance.
  • A captive is an insurance company wholly owned and controlled by its parent company, association or group, and organized to insure the risks of its parent company, association or group members.
  • Captives represent an alternative to the traditional market with the benefits of true insurance.


  • Companies with:.
    • Financial stability
    • Good spread of risk with predictable losses
    • Good loss history
    • Good risk management practices
    • The ability to finance its own exposure
    • Long-term commitment from senior management
    • Unusual or hard-to-place risks
    • Strong business partners
    • Primary purpose of captive is other than the tax benefits


  • A desire to retain control over company assets.
  • To formalize risk retention financing.
  • To improve coverage of risks.
  • To reduce the costs of financing loss.
  • To create a new profit center.
  • To smooth the cyclicality if the insurance market.
  • To capture underwriting profits.
  • To tailor policy to company's specific needs.
  • To reduce insurance costs.
  • Direct interest in improved risk management through loss control.
  • To reduce loss through control of claims management.
  • To improve investment management of claim reserves.
  • To increase tax saving opportunities.
  • Pure/Single Parent Captive
  • Association/Group/Industrial Insured Captive
  • Sponsored (cell) Captive
  • Special Purpose Financial Captive
  • Branch Captive
  • Risk Retention Group
  • Owned 100% by its parent.
  • Insures only the risk of related entities (parent, affiliates, subsidiaries and controlled unaffiliated business).
  • Represents a majority of captives worldwide- 75%-85%.

    pure single captive

    pure single captive
  • A group captive can encompass different structures, including:
    • Association; and
    • Industrial insured.
  • Common attributes of a group captive:
    • Ownership resides with unrelated entities or individuals;
    • Insures the members of the group;
    • Formed to capitalize on group "buying power"; and
    • Insureds share program results.
  • Association captives are sponsored and owned by trade, service or industry associations for the benefit of their members.
  • Industrial insured captives are typically formed by two or more business owners to insure similar risks in the same industry.

    association captive
  • Generally, created by a "sponsoring" entity which could be a corporate parent, affiliate, or third party such as a captive manager, insurance company or insurance producer.
  • Accounts (often referred to as "cells" or "protected cells") are created through participant contracts, segregating the assets and liabilities of each account from the other accounts and from the sponsored captives general account.
  • Account holders need not have any affiliation with the sponsors.
  • Sponsors will charge a fee to account holders for services provided and use of capital.
  • Advantages are ease of access, lower start-up costs and lower annual operating costs.

    sponsored captive
  • Allows securitization transactions by a captive insurance company, thus transferring insurance risk to the capital markets.
  • Provides captives with an alternative source of capital to address reserve requirements.
  • The securitization requires two steps:
    • Creation and licensing of a Special Purpose Financial Captive ("SPFC"); and
    • A security offering.
  • A typical SPFC securitization includes:
    • SPFC selling debt to a capital market underwriter who converts the debt into money market securities for sale to institutional investors;
    • Captive's parent, or counterparty, cedes risk to the SPFC for a specified premium, usually in the form of a reinsurance transaction;
    • Premium, investment income and other revenue sources fund the debt instruments;
    • Proceeds of the securitization are held in trust and used to fund required reserves;
    • Trust funds provide credit for reinsurance and to pay ceded obligations.
  • Typically a subsidiary or affiliate of an alien (offshore) captive, therefore a "branch" of an existing captive.
  • Formed and regulated much like a pure/single parent captive.
  • A branch captive is used in situations where the parent of an offshore captive wants to insure risks which can only be written in a U.S. based insurance company (i.e., employee benefits regulated under ERISA).
  • The parent creates an onshore branch of its offshore captive rather than forming a new U.S. based captive in order to achieve capital and operating efficiencies.
  • It's a special form of group risk sharing entity created pursuant to the federal Liability Risk Retention Act of 1986.
  • Regulated by Connecticut under its captive statute.
  • Risk retention groups operate like group captives.
  • Federal law allows risk retention groups to operate in all 50 states, even though only licensed in the state of domicile.
  • Risk retention groups are restricted to covering only the liability risks of its members.
  • Risk retention groups are operationally more complex and costly to run than group captives.
  • Fronted Program:
    • The captive partners with a licensed carrier to issue policy(ies);
    • The captive acts as a reinsurer;
    • The advantages are (1) experience of fronting carrier, (2) ease and speed of launching program, (3) access to quality aggregate reinsurance, and (4) fewer regulatory compliance issues for the captive.
  • Direct Written Program:
    • The captive issues the insurance policy(ies);
    • Advantages are (1) control over program, (2) ability to tailor policy(ies) and coverages to a greater degree.
  • The first step to launching a captive program is to conduct a Feasibility Study, which should include:
    • Cost/benefit analysis;
    • Actuarial analysis;
    • Financial projections;
    • Tax analysis;
      • Formulation of a preliminary business plan, including:
      • Business case for a captive;
      • Coverage lines, limits, rules, rates and policy types; and
    • An analysis of the proposed legal structure for the captive.
    • Review of current insurance program;
    • Analysis of reinsurance program; and
    • Review of historical loss data.
  • Strong state commitment to captive market.
  • Knowledgeable service sector
  • Convenient location.
  • State-of-the-art captive law.
  • Strong industry trade group.
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