What Is Captive Insurance?
One of the ways that companies ordinarily attempt to manage risk is by taking out insurance policies on their assets. In this way, they can turn the risk of a major loss into something on which they instead make fixed payments that guarantee them against suffering the full consequences of a loss. This is similar to an individual who insures their car, making fixed payments in order to protect themselves from the possibility of having to absorb the full cost of a catastrophic accident. When businesses are not able to get affordable insurance on the regular market for it, they sometimes turn to Captive Insurance as another option.
A company is using Captive Insurance when it essentially creates a subsidiary of itself with the sole purpose of providing insurance to the parent. In this way, a company can completely bypass the issue of whether it would be considered to be an attractive risk to the insurer. It can also often get much better rates than it could otherwise because the captive that is providing the insurance is not attempting to make a profit. It is only attempting to provide help with risk management and nothing more.
There are special laws in many companies to govern this practice, and some countries actively try to attract this form of business. For example, Isle of Man Captive Insurance was made more appealing when they passed rules in 2004 that explicitly permitted the operation of protected cell companies on their island. Protected Cell Companies are basically a way of having multiple companies operate with the own revenue streams, assets, and liabilities while being able to share portions of their overhead. The effect of this is that it is economical for a much wider variety of businesses to consider the possibility of using this type of insurance because they can share costs.
Captive Insurance is not the right choice for every company, but it can be a great choice. It is particularly appealing for those who are looking to reduce their premium costs, or those who simply can not get typical insurance companies to agree to cover them.
