Oregon shall license its first captive insurance companies in January 2013. Although Oregon The term "captive" insurance became popular in the early 1960's even though there were roughly 100 similar entities formed through the first half of the century. Still it was not until the 1970's and 1980's that the captive insurance industry began to experience explosive growth. This remarkable growth was in a large part a response to very "hard" insurance market cycles wherein coverage had become either very expensive or could not be found.

But hard insurance markets were only a catalyst for the captive industry's growth. In 1982 there were a little over 1000 captives worldwide. Over the past 30 years the primary driver of industry growth has been the innate advantages of captive insurance and not market cycles. Today there are nearly 6000 captive insurance entities.

Nearly every Fortune 500 corporation has captives. It is hard to identify a major corporation that does not have at least one captive insurance company. Example: A corporation may have one captive that primarily covers the corporation's property and casualty risk to include; general liability, environmental liability, and product liability risks. The same corporation may then have another captive that insures their employee benefit liabilities, such as workers compensation and healthcare benefits. All entities that are called "captives" are not necessarily captive insurers in the strictest definition.

Ultimately, in its most simple form, a captive insurance company is an insurance company owned by the parent that underwrites the insurance needs of the parent's risks and exposures.


Single-Parent This is the most basic and the most common form of captive for it insures the risks of related to the parent company.
Group / Association This type of captive insures the risks of companies typically within an industry group, franchise, or other association. A group or association captive can spread the risk among several participants and also spread the fixed costs amongst the members.
Agency An agency captive is typically formed by insurance brokers (agencies) to allow the agency to participate with quality client risks with which they are associated. Agencies that specialize in a specific industry may organize a captive their clients and in doing so providing better services, capacity, coverage and price.
Rent-a-Captive A rent-a-captive facilitates access on a retail or a "rental" basis. Also called "protected cell captives" this form of captive enables users to segregate their assets and liabilities within separate "cells" or "vehicles". This structure allows many cells / vehicles to be created within the same captive.
Risk Retention Group - RRG The Liability Risk Retention Act established RRGs in 1986. An RRG can cover the liability exposures of its multiple owners. An RRG is not the same as a self-insured group that exclusively cover workers compensation exposure of its owners. An RRG licensed in one state it can operate in any other state without additional licensure.
Special Purpose Vehicles (SPVs) SPVs are reinsurance companies. They issue reinsurance contracts for their parent company and then "cede" (sell and relinquish) the risk to the capital markets by way of a bond. SPVs are used for added risk securitization.
Other captive types exists but are typically less easily defined:
  • Direct writing or Fronted captives
  • Onshore or Offshore
  • Primary or Excess layer captives
  • Stock captives
  • Mutual captives
  • Reciprocal captive

 

Who best qualifies is often difficult to define. Depending on a few characteristics many companies may enjoy the benefits of alternative risk transfer through captive insurance. Companies that already retain risk for workers' compensation, employee benefits, or other lines of coverage already understand some of the benefits.

A company's risk is often compared to an iceberg wherein what is readily exposed is known and seen but often much less than that risk exposure that is unseen and below the surface.

Easily identified and insurable risk:   Alternative risk transfer:
  • Property
  • Malpractice
  • General liability
  • Commercial auto
  • Workers' compensation
  • EPLI
  • D & O
  • E & O
  • Credit
  • Disability
  • Warranty
  • Hurricane
  • Earthquake
  • Deductibles
  • Malpractice
  • Operation risk
  • Standing timber
  • Mold – Pollution
  • Policy exclusions
  • Defect and design
  • Product warranty
  • Liable and slander
  • Strike/labor unrest
  • Advertising liability
  • Performance liability
  • Business interruption
  • Copyright infringement
  • Supply-line interruption
  • Cargo consequential loss
  • Deceptive trade practices
  • Communication interruption
  • Antitrust and unfair competition

 
  1. The Feasibility Study
    The Purpose: To determine if a captive insurance company makes financial sense for you.
    Feasibility Study:
    • Define Objectives
      • Financial
      • Business
      • Identify risks of the captive
      • Analyze financial effects of the captive on stakeholders
      • Cash flow/tax benefits

  2. The Actuarial Study
    The Purpose: To provide models that contain suggested retention limits.

  3. The Selection of Providers
    The Purpose: To identify and initiate relationships with qualified business partners. The selection of partners, as with any commercial venture, is one of the most important determinations for success or failure. Partners include:
    • Accountant
    • Actuary
    • Captive Management Firm
    • Legal Council
    • Third Party Administrator

  4. Introduction to Regulators
    The Purpose: Many domiciles will require an interview with the regulators prior to an application being granted.

  5. The Insurance Application
    The Purpose: The insurance industry is highly regulated and requires unique-to-the-domicile filing of the captive's license applucation with chosen domicile's insurance department/regulators/finance ministry for approval. The application will generally include:
    • Information about the company's shareholders, directors, and officers
    • Information about the captive insurer
    • A business plan describing how the company will conduct the business of insurance to include:
      • Capital Requirements
      • Coverage Types and Limits
      • Design and Purpose of the Captive
      • Economic Impact Statement
      • Fees and Related Expenses
      • Fronting Requirements
      • Insured Entities
      • Investment Policies
      • Management
      • Pro Forma Captive Financial Statements
      • Risk Management and Claims Practices
      • Service Providers
      • Structure of Governance

  6. The Formation & Incorporation
    The Purpose: Subsequent to the insurance application approval a domicile document of "authority" is issued that allows the formation of the captive insurance company. The document of authority is taken to the Director/Administrator/Secretary of State and a Certificate of Incorporation that forms the captive is issued.

  7. The Capitalization of the Captive
    The Purpose: The captive insurance company is capitalized by depositing cash into a bank account in the name of the captive. The capitalization is set by the domicile consistent with the actuarial report. The capitalization typically starts at $100,000 an may go up to $1,000,000 depending on variables.

  8. The Licensing
    The Purpose: Upon proof of the Certificate of Incorporation and capitalization the Director or Insurance Commissioner will issue the insurance license to the captive.

  9. The Management
    The Purpose: A captive management company is required by the domicile for authorized management services. Domiciles prohibit parent company management of a captive. Captive Management service contracts and fees will vary depending on the size of the captive, the number and type of coverages in the captive and the scope of other services. The captive management company insures that the captive stays in compliance with the terms of its license and meets all regulatory requirements.