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ALTERNATIVE RISK TRANSFER THE USE OF CAPTIVES What is a Pure Captive? A pure captive is a licensed insurance carrier
that is controlled by a parent corporation (the “parent”) and whose entire
business consists of insuring or re-insuring the property/casualty or
workers’ compensation risk exposures of the parent (or affiliates of the
parent). Although the captive insures
only the parent’s (or affiliates’) risks, the captive generally functions
like a regular commercial insurer: it issues policies to its policyholder
(the parent/ affiliate), collects premiums, disburses claim payments,
prepares balance sheets and income statements, and complies with the
regulatory requirements of the jurisdiction in which the captive is
domiciles. Generally speaking,
captives are not regulated nearly as stringently as commercial insurance carriers
because captives are not engaged in the business of insuring the general
public. While Risk Retention Group
Insurance Company’s are regulated for the most part as traditional
Insurance Company’s. Why do employers establish and maintain Pure Captives? Parent companies typically
establish captives in order to obtain convenient and practical vehicles for
retaining property and casualty or workers’ compensation risks that would be
unreasonably expensive for the parent to insure in commercial insurance
markets. In “hard” markets where coverage
is unavailable or the premium rates for available coverage are high, the
Business Owners tend to insure or reinsure more risk in their captives and
less risk in commercial insurance markets. For example, a captive may be established
for the purpose of reinsuring the parent’s workers’ compensation liabilities,
general liability, auto liability, property or even employee benefits. Under the reinsurance arrangement, the
so-called “fronting insurer” (if Workers’ Compensation) would issue a
policy to the parent for the parent’s workers’ compensation coverage. By pre-arrangement, the fronting insurer
would then reinsure all of the parent’s risk to the parent’s captive. The net result: the fronting insurer
handles the administrative functions, while ceding risk of volatile claim
losses back to the parent’s captive.
The parent finds this reinsurance for Workers’ Compensation
arrangement attractive because the parent can afford to absorb claim
volatility and choose not to pay a commercial carrier for bearing this risk. |
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F. Darrell Lindsey U.S. State
Licensed/Agent/Broker Self Insured Manager |
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