Captive Insurance
A subsidiary insurer formed by a parent company to finance its own risks.
What is Captive Insurance?
Captive insurance is an alternative risk-financing arrangement in which a company establishes its own licensed insurance subsidiary to cover some or all of its risks. Rather than paying premiums to a commercial insurer, the parent retains the premium dollars in the captive, which pays claims directly. Captives are used by large corporations to reduce insurance costs, access reinsurance markets, cover risks that commercial markets price expensively or exclude altogether, and gain greater control over claims management and coverage terms.
Example
A multinational manufacturer with $500 million in annual revenue finds that commercial insurers charge high premiums for its specialized product liability exposure. It forms a captive insurer in Vermont, channels $10 million in annual premiums into the captive, and uses those funds to pay claims and purchase reinsurance for catastrophic losses — saving an estimated 20% compared to commercial market pricing.
Source: National Association of Insurance Commissioners — Captive Insurance