Glossary
Captive insurance, defined
A licensed insurer owned by the business or group of businesses it covers, formed to insure their own risks rather than to sell to the public. The owners pay premiums to their own company, which pays their claims and keeps what is left after expenses and reinsurance.
In practice
Single-parent captives are formed by large companies; group captives pool mid-sized businesses in the same trade or with similar loss profiles, and are the version an independent agency is more likely to introduce. The arrangement keeps underwriting profit and investment income within the group, gives direct control over claims handling, and can cover risks the commercial market prices badly or refuses. Against that, the owners put capital at risk, share in each other's losses, pay for management, audit, actuarial and regulatory costs, and must buy reinsurance for the large claims. A fronting carrier is often needed so certificates and state filings are accepted. It is not a tax device; the arrangement must transfer real risk and be priced at arm's length. The analysis looks for stable losses, a premium large enough to carry the fixed costs, and a management team that wants the control.
A worked example
Suppose eight contractors, each paying about $400,000 a year in commercial premiums, form a group captive. They contribute $2.4 million in premium and $800,000 of capital, and buy reinsurance above $250,000 per claim. In a year with $1.2 million of claims, roughly $700,000 remains after expenses and reinsurance, and it is returned to the owners over time. In a bad year the capital absorbs the shortfall. Hypothetical figures.
Applies to: Contractors Insurance