Captive Insurance Company

In simple words, a Captive Insurance company is one in which the insurer is wholly owned by the insured. Most of the large multinational companies which have operations in various continents have Captive Insurance Companies. Indian law including tax laws need change for captives and hence as of today there are no captives in India. Captives are part of the “Alternative Risk Transfer (ART)” market.

There are different types of captives and one of the types is “Association Captives”. For example, a farmers’ association could form a captive. Of course, an association could also think of creating a Mutual Insurance Company.

The biggest advantage an insurer has is geographical spread of risk which ensures that when large or catastrophic losses occur, their book is able to withstand such large losses. Further, they use Reinsurance as a risk management tool for ensuring stability in loss ratios and catastrophic protection.

When an insured is able to achieve this geographical spread of risk themselves, they need not transfer the risk to professional insurers. They can create their own Captive Insurance company and manage the risk. For that one off very large risk loss or event loss, (say for losses with return period greater than 10 years), these captives can buy excess of loss reinsurance. In this way, they are able to participate in the underwriting profits as well as create an investment income. And the biggest advantage is that they can create an insurance product which meets their requirements of risk coverage rather than having to force fit themselves into a commercial insurer’s standard products. And they can create their own risk management program.

Excess of loss reinsurance could be Risk XL or CAT XL or Stop Loss. We will look at Stop Loss Reinsurance in tomorrow’s blog.

Blog by Atmaram Cheruvu