A captive insurance programme reduces the premiums paid to third party insurers.
At its most basic level this can be achieved by a business, with one or more subsidiaries, establishing a captive insurance company as a wholly owned subsidiary. The captive is capitalised, and domiciled (opens new window) in a jurisdiction with captive-enabling legislation (opens new window) which allows the captive to operate as a licensed insurer. The parent identifies the risks of its subsidiaries that it wants the captive to underwrite (opens new window). The captive evaluates the risks, writes policies, sets premium levels and accepts premium payments. The subsidiaries then pay the captive tax-deductible premium payments and the captive, like any insurer, invests the premium payments for future claim payouts.
Where trade credit risks are covered in a captive arrangement, credit insurers can support this approach by providing re-insurance to the captive. Otherwise they can provide expertise on credit decisions based on either a whole turnover or catastrophe basis
A rent-a-captive gives clients greater control over their insurance programmes, usually including a reduction in the overall risk costs and the ability to insure otherwise uninsured risks.