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Who's watching out for you

Types of Captives

Single Parent Captive (related risks)

This is an insurance or reinsurance company that only insures its parent or affiliated companies.

Single Parent Captive (non related risks)

First party and third party risks are insured by the captive - Diversifying the business base to include the insurance of third party risks of customers and clients may change the captive from a cost center into a profit center.

Group Captive

This is an insurance company that insures or reinsures the risks of either a homogeneous or heterogeneous group of companies who may, or may not, be owners of the company. Risks are shared between all participants, and there may be a level of self retained losses using Class A (individual retentions) and Class B funds (shared retentions) within this sharing mechanism.

Association Captive

This is a company owned by a trade association and used to meet the insurance needs of its members.

Agency Captive

This is a company owned by an insurance agency, which utilizes it to take risk in some of the business they place in the insurance market.

Rent-a-captive

A rent-a-captive is an arrangement in which a sponsor provides the capital for a captive company, which is then accessed by clients to write captive insurance business. The clients pay a charge to the sponsor for the 'rent' of the capital. Side arrangements, such as guarantees or letters of credit are used to ensure that the sponsor's capital is not placed at risk.

To some extent this type of arrangement has been replaced by the segregated portfolio company (SPC). However, both rent-a-captives and SPC's are viable entities for agency captives and both have distinct advantages.

Segregated Portfolio Company "SPC"

This company is often known as the "Cell" captive and is set up with a "core" which usually doesn't take risk. Various segregated portfolio's (cells) do infact assume individual risks. The assets and liabilities of each cell are segregated from each other. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participation agreement. This is a useful vehicle for those programs not large enough to set up their own captive or that do not wish to manage their own captive.

Captive insurers are formed to provide commercial insurance coverage to one or more entities. The following types of captives are presented along a continuum of narrow to broad participation:

A pure captive insures the risks of its owners, affiliated entities, and controlled unaffiliated entities.  Since pure captives don't provide direct coverage outside of their "business family," consumer protection regulations rarely apply.  Thus, pure captives enjoy maximum flexibility in the types of coverages they can write, the types of investments the captive can have, and regulatory reporting requirements are much less than other types of captives .

A group captive is a general term for an industrial insured captive, association captive, or risk retention group whereby the captive is providing coverage to a group of affiliated and unaffiliated entities. An industrial insured captive writes insurance coverage only for a group of organizations that meet certain size and operational criteria.  An association captive only insures the risks of the association members. A risk retention group (RRG) provides only liability coverage to entities that are within a certain industry pursuant to the Federal Liability Risk Retention Act of 1986.

In general, the above types of captives are capitalized by one or more entities affiliated with the captive's insureds, giving the insured owners maximum control over the operation and activities of the captive insurance company. This changes when we get to the next type of "captive."

An agency captive, rent-a-captive, sponsored captive, or a protected cell captive differ in that the captive's capital is provided by an unrelated entity (typically an insurance company or insurance agent/broker).  The captive sponsor then "rents" capital and/or cells to various insureds (much like a hotel rents rooms to travelers) and provides various services to the cell participants (for a fee).  While these types of "captives" are easy to enter and don't require an up-front capital investment by the insured participant, they offer the least amount of control over captive costs and operations and can be difficult to exit.  Due to  because the sponsor having its capital at-risk, the sponsor usually requires that each cell be fully funded or collateralized up to each cell's maximum exposure for as long as the exposure exists in the cell.

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