Often perceived as an option solely for Fortune 500 companies, captive insurance companies are becoming more accessible than ever for small- and mid-size companies.
What is an Insurance Captive?
For those considering joining a captive program, it is essentially an insurance company. The captive operates like a commercial insurer; however, the insureds are oftentimes key players in the decision-making process. This is one of the key differences between an insurance captive and a mutual insurance company. In a mutual insurance company the policyholders do not have direct control. Rather they present their votes to the company’s board through a proxy who then exercises the policyholder’s vote.
The reason insureds in an captive insurance company have greater control is because they invest more of their own resources into the group. While this does present additional risk, insureds often benefit from the group’s profitability. While policyholders of a mutual insurance group are entitled to receive dividends, it is often the case that these insurance companies accumulate rather than distribute their surplus.
According to the National Association of Insurance Commissioners, there are five common types of captive insurance companies:
- Single-Parent Captive – A company writing only the risks of its parent and/or affiliates. Single-parent structures are often referred to as wholly owned or “pure” captives.
- Group Captive –A captive established by a group of companies with similar businesses or exposures writing only the risks of its owners and/or affiliates.
- Association Captive – A captive owned by a trade, industry or service group (e.g., doctors) writing only the risk of its owners and/or affiliates. An association captive is similar to a group captive except that it is sponsored or owned by a group of entities within a particular organization with common insurance needs and similar exposures.
- Rent-a-Captive – A captive owned by an outside organization and open to participants for a fee. Members “rent” licenses and capital from the rent-a-captive owner. A rent-a-captive, or rental captive, is often used by entities that prefer not to form their own dedicated captive or for a program that is too small to justify incorporating its own captive.
- Risk Retention Group (RRG) – Approximately 250 RRGs in the U.S. are organized as captives. An RRG is an association or group captive formed for the principal purpose of assuming and spreading risk for commercial liability exposure. It is important to note that not all RRGs are licensed as captives. The formation of RRGs is authorized by a federal law—the Liability Risk Retention Act of 1986—that limits many of the regulatory requirements that otherwise might be imposed on RRGs by non-domiciliary states.
If your company is suffering from rising insurance costs or is having a hard time obtaining certain types of coverage, then forming your own captive, or joining an existing captive, may help alleviate your company’s woes.
Truck Writers, Inc. acts as a Third Party Administrator (TPA) for the truck insurance captive Transportation Alternative Risk Program (TARP). To learn more about our insurance captive or commercial trucking insurance, contact us today!