An insurance company that is considered to be a captive insurer generally means that it’s completely controlled and owned by the people it insures. This means that the business model supports insuring the risks of its owners. Additionally, the people that participate in captive insurance benefit from the underwriting profits.
Captive insurance is generally used by people who want to create their own insurance company by putting their capital at risk, achieve their financial goals with risk financing, and who want do not want to work within the confines of the traditional insurance system.
Insurance firm Caitlin Morgan states that captive insurance can be an “attractive alternative risk solution to self-insurance.” While captive insurance companies used to be primarily used by larger corporations, many small and mid-size businesses are seeking out this type of insurance.
Types of Captives
There are two main types of captive insurers. Sponsored captives are controlled and owned by parties that are not related to the insured. Pure captives, however, are owned 100% by their insureds – either directly or indirectly. While pure captives generally only cover the risks of their owners, sponsored captives don’t necessarily pool together the risks of the insured.
There are some ways that a captive insurance company seems like a mutual insurance company, mostly in function. The owners of a captive insurance company, however, are in direct control of their insurer and they are required to put their own capital up for the risk.