Captive Insurance, Self-Insurance, Risk Retention Group, Protected Cell Captive

What is Captive Insurance?

A Basic Definition

If you ask the majority of individuals involved in the insurance industry, the most common explanation and / or definition you will receive is this:

A captive insurance company is a company that is owned by the insured.

While true and accurate, this definition creates more questions than answers. What is the difference between a captive insurance company and a traditional insurance company? Why would a business want to own a captive insurance company?

What’s The Purpose Of A Captive?

Generally speaking, captive insurance companies offer an alternative method to finance risk to loss. Oftentimes a business will apply for insurance, providing information to an insurance agent who then forwards said information to the insurance company’s underwriting department. If that business meets the underwriting requirements of that particular insurance provider, they enter into a contract in which the insurance company agrees to provide repayment of losses under specified circumstances and the insured agrees to pay a set premium.  While the theme may vary in many ways, the basic process is known as “traditional insurance.”

When a company can’t secure insurance for a particular risk, they have to find an alternative solution.  By forming their own captive insurance company, a business can ensure that specific risks are covered in a cost-effective manner.

Comparing Captives to Traditional Insurance

As a captive Insurance Company, you become intimately involved in all aspects of not only paying the premium, but also establishing what that premium will be and how often it will be paid. In some cases, a traditional insurer will suggest reducing its cost by having the insured handle small losses


Deductibles, retentions and coinsurance are often used to reduce premium cost for insurance and help insurance companies avoid what is often referred to as nuisance costs. For large risk, current accounting and tax rules don’t provide deductions for any reserves held in payment for future losses. However, if those funds are collectively called an insurance premium, they are deductible.

The captive can reinsure traditional lines including workers compensation, general liability, Auto liability, professional liability and credit risk.

The most widely known advantages of a captive is that it can be used to provide coverage and limits that simply aren’t available throughout the insurance marketplace, such as credit risk and terrorism.

Captive insurance offers many benefits, such as:

  • Tailoring coverage to meet your specific needs
  • Reduced operating cost
  • Increased cash flow
  • Greater coverage and capacity
  • Investment income to fund losses
  • Access to wholesale reinsurance markets
  • Flexibility in both funding and underwriting
  • Greater control over claims