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Captive insurance companies

NEWS_PUBLISH_DATE 27 April 2018
Captive insurance companies image

Captive insurance is a method of financing risk, which in recent decades has become increasingly popular among national and international companies. The parent company establishes a subsidiary to insure certain of its risks. The incentive to set up a captive company was that, in general, the insurance market was not prepared to accept certain risks for insurance or to provide full coverage (an example of this could be insurance guaranteeing the operation of a certain product).

The main goals of the captive are:

  • Take advantage of group risk control methods by paying premiums based on their own experience;
  • To avoid overheads of the direct insurer;
  • To obtain a lower premium level for the entire risk by purchasing reinsurance as an insurer and therefore at a lower price than that required by the traditional or direct insurer;
  • To create a capricious company in an area with a favorable tax regime.

As duly registered insurance companies, capitals have access to the reinsurance market (and to alternative risk financing) under similar conditions to ordinary insurance companies.

Premiums paid to a captive company are usually exempt from corporate tax, although in the United States, tax authorities have waived the tax credit for these premiums if the captive company does business with risks only from the parent company. This created the concept of mutual pools in which business is "exchanged" between captive insurers.

Mutual insurance associations

Mutual insurance associations differ from cooperatives in that the latter accept unlimited business from society, while mutual insurance associations accept business only from members of a particular professional guild. Over the years, many associations have had to accept business from members of society in order to ensure greater financial stability and risk-sharing, and have been reformed as mutual insurance cooperatives or private companies.

Mutual insurance associations have grown out of professional associations and are common pools in which members of a particular professional goldsmith contribute and to which they can sue if necessary. Associations are formed when members of a particular professional guild feel that the cost of commercial insurance is too high in terms of their personal experience with claims or that they have an insurance need that is not being met by the market at the moment. Examples of professional guilds that have had such associations in a certain period are those of pharmacists, farmers, furniture manufacturers and shipowners.

Previously, there were several associations within a professional guild, each of which insured the business mainly from a certain region, for example: farmers in one country or in a certain region of the country.

The goal achieved by these mutual organizations can also be well achieved through split or "hired" captive insurance companies (which are often run by leading insurance companies or brokers). Once transformed into captive companies or mutual insurance organizations, these insurers can purchase reinsurance and other alternative risk financing products.

 

Source: David E. Bland "Insurance: Principles and Practice"