What Are the Different Types of Captive Insurance?

An insurance company set up by an industrial and commercial enterprise itself for the purpose of risk insurance or reinsurance for this enterprise, its affiliates, and other related enterprises. Referred to as self-insurance company.

Captive insurance company

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Established by the industrial and commercial enterprises themselves, with the aim of

1. Increased risks require companies to improve their risk self-insurance capabilities

2. The need for enterprises to reduce risk management costs

3.The special temptation of offshore tax havens

1. A pure captive company refers to a company that is wholly owned and controlled by the parent company and only the main business owned by the parent company is the insurance object.

2. A major captive company refers to a company that is wholly owned and controlled by the parent company, but its underwriting risks come from outside the company in addition to the parent company.

3. Association captive or group captive companies refer to companies in which two or more parent companies cooperate to underwrite the risks of these parent companies. These parent companies share premiums and share the risks.

4. Risk retention captive group. This is a special form of joint self-insurance company that specializes in underwriting a specific liability risk. This type of self-insurance company was created in the United States and was approved under the Product Liability Risk Retention Act of 1981 and the Liability Risk Retention Act of 1986.

Captive insurance companies operate with different focuses. Captive insurance companies in the United States are mainly engaged in accident insurance, especially product liability and professional liability insurance. Captive insurance companies in Europe usually provide protection for property and material damage.

From the perspective of underwriting business, professional captive insurance companies can engage in direct insurance business or reinsurance business, but the new trend of captive insurance company's business activities is to engage in reinsurance business. This is mainly because many countries prohibit unauthorized insurance companies from operating insurance business locally and stipulate that certain types of insurance can only be operated by authorized insurance companies, which prevents captive insurance companies from entering the local direct insurance market. In view of the restrictions on direct business, many captive insurance companies indirectly underwrite the business of the parent company and its subsidiaries and the business of non-affiliated companies through reinsurance.

Captive insurance companies are mainly engaged in reinsurance business through "front-end insurance plans". An exclusive insurance company chooses an insurance company that has obtained a business license in a certain place, and signs a "front-end insurance plan" with the company, that is, the local insurance company first underwrites the risks of the local enterprise, and then sub-insurances to a professional captive insurance company, local insurance The company is called Fronting Insurer. The frontier insurer's approach to reinsurance operations can be implemented in many countries. The prerequisite is that a country has no restrictions on the reinsurance business in the local insurance market. If the state monopolizes the reinsurance business, the enterprise's risk can only stay in the local insurance market. Cannot be indirectly covered by a captive company.

In a typical cutting-edge insurance plan, front-line insurance companies and captive insurance companies often reinsurance in a proportional manner. Leading-edge insurance companies retain only 10% of their business and premiums, and distribute 90% of their business to captive insurance companies. Self-insurance companies pay a fronting fee to the frontline insurance company to compensate for their operating expenses. The cost is usually between 3% and 15% of the reinsurance amount. The specific proportion depends on the nature of the business. This is equivalent to a reinsurance commission.

Whether a captive insurance company engages in direct insurance business or reinsurance business, it has an inseparable link with reinsurance. Captive insurance companies can only operate direct business and reinsurance business if they properly arrange reinsurance. For example, in order for a captive insurance company to obtain the business of a leading insurance company, it must inform its reinsurance plan in advance and obtain the approval of the leading insurance company. The captive insurance company must assure the leading insurance company that in the event of financial difficulties of the captive insurance company, the leading insurance company may obtain compensation from the captive insurance company, or both parties may allow the leading insurance company to take the Contact the transferee directly.

Captive insurance companies must rely on the reinsurance market due to their inherent weaknesses, such as their limited business scale, poor quality of risk underwriting, and small organizational size. Therefore, captive insurance companies are not only buyers of reinsurance, but also sellers of reinsurance. An important reason for the establishment of a captive insurance company is that it can obtain reinsurance. Many reinsurance companies only deal with insurance companies, and do not deal with non-insurance companies. By setting up a captive insurance company, companies can directly enter the reinsurance market to spread risk and expand their underwriting capabilities. Direct reinsurance by captive insurance companies can reduce insurance costs because the loss rate of a company is directly linked to the reinsurance rate. At the same time, reinsurance is more flexible in terms of the form of insurance protection provided and the reflection of new risks, and can meet the special requirements of enterprises.

Through reciprocal exchange business, captive insurance companies can expand their scope of risk diversification, and also obtain services that cannot be obtained due to the limited underwriting capacity of captive companies. Captive insurance companies exchange part of their underwriting business with other captive insurance companies or insurance companies on the basis of equal profit for both parties. The total business volume can remain unchanged, or even expand the volume of business, so that captive insurance will not be reduced Profitability of the company.

Choice of location for captive insurance company

In principle, captive insurance companies can be incorporated in any country or region in the world, but are generally concentrated in those countries or regions with relatively loose controls and low tax rates. The main reason is that the self-insurance business in these countries or regions has developed for a long time, and can adjust its own strategy in time according to market changes, so as to maintain its own advantages. Bermuda is a place where captive insurance companies are concentrated, accounting for 1/3 of the world, while captive insurance companies that choose to register on the five islands of the British colonies account for 67% of the world.

Captive Insurance Company Management

The early captive insurance companies were all managed by the parent company, or some independent management companies were entrusted. Now, in addition to the parent company's own management or entrusted management company management, the exclusive insurance company can also entrust insurance brokerage companies and insurance companies to manage. Captive insurance companies will need to spend a lot of costs on their own management, because they will need to hire relevant professionals and increase labor costs, which means that there will be a lot of business to support higher expenses. Therefore, only captive companies set up by large companies with higher assets manage themselves, and most professional captive companies are managed by captive management companies owned or controlled by insurance brokers or insurance companies. From the perspective of efficiency, the newly established captive insurance company has a small business volume, which is not enough to maintain a high staff cost. Therefore, it is generally not to use its own management, but to ask the management company to take care of it. But captives are not just for new captives. They provide experts. Experience and the production of economies of scale are not necessarily available from the parent company and its subsidiaries from their own resources. For most captive insurance companies, the services provided by the management company can produce better economic benefits than their own operations. , They are more willing to hire a self-insurance management company to host it. Where overseas captive insurance companies are concentrated, there will also be more captive insurance management companies. They mainly provide captive insurance companies with financial accounting, underwriting, reinsurance, tax, claims and actuarial services.