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Who's watching out for you

How Captives Work

Captive Feasibility, Licensing, and Formation

The first step for any captive program is the feasibility and development of a business plan and licensing application for the captive. This step will include identifying the insurance coverages to be written by the captive, determining the premiums for the proposed coverage, deciding what service providers will be needed, determining captive ownership and capitalization, and identifying where the captive will be formed (domiciled) and regulated. 

Once the decision is made to form a captive, your captive manager leads the captive licensing and formation process.  Depending on the captive domicile, the complexity of the captive business plan, and the efforts by the captive manager, this process can take as little as 30 to 45 days or as much as 6 to 12 months.

Issuing Insurance Policies

Most, but not all, captive insurance policies can be directly issued by the captive to its insureds without the need for an insurance agent or an admitted insurance company to be involved.  Exceptions include policies which are required by state or federal law to be issued by an admitted insurance company.  The captive's insureds might also be required under contracts or loan provisions to provide evidence of insurance from an admitted highly-rated insurance carrier.

When laws or contracts require policies from an admitted carrier, the captive can enter into a fronted arrangement whereby the captive reinsures a portion of the admitted carrier's risk for the policies being fronted.  Fronted insurance programs are more expensive than direct written policies and typically have operational restrictions placed on the captive by the admitted carrier.  Fronting carriers also require that the captive provide collateral or a funded trust to secure the liabilities under the fronted policies, which also increases costs.

Direct issued policies do not require the use of an insurance agent or broker.  Fronting carriers will require that a licensed insurance agent or broker be used to bind coverage and may include the cost of agent commissions in their fronting fees.

Banking & Investments

Captive assets are controlled and invested at the direction of the captive's board or investment committee.  Pure captives have the greatest flexibility in the types and amounts of investments and have fewer regulatory reporting requirements than group captives.  Risk retention groups are subject to quarterly and annual NAIC (National Association of Insurance Commissioners) detailed reporting.

The investment income earned by the captive can further reduce the insured's cost of risk, in that this income can be used to pay claims or reduce future premiums.


Captives, as insurance companies, pay claims under the policies that are issued.  Who adjusts claims is usually up to the captive owners: claims may be adjusted by the captive manager, by a third party claims administrator, or by the captive board's claims committee.  Most fronting carriers require that claims under fronted policies be adjusted by the fronting carrier's staff or a pre-approved third party claims administrator.

Captives have a lot of control over how claims are adjusted, adjudicated, and settled (less control exists under fronted policies).  The captive board determines which firms are used for defense, the strategies that will be utilized, and the fees that will be paid for defense and investigation.  This control is particularly important for insureds who are dealing with customer claims, as the insureds reputation and relationship with customers is very important.

Risk Management

Captive insurance companies can improve financial and operational risk management for the businesses they insure.  Each insured business transfers risk to the captive in exchange for paying a fixed premium, thereby protecting operating budgets.  Captives can assume risk from multiple insureds, creating a more predictable pool of risks.  Captives can also be the centralized funding source for loss prevention and loss mitigation programs.  Since captives typically use the services of outside actuaries, insurance-savvy captive managers, and investment firms, captives offer much more risk management expertise to its insureds than is typically the case under self insurance or commercial insurance.


The captive's board of directors is responsible for adopting the captive's policies and procedures as well as overseeing the captive's operations.  Directors are nominated and elected by the captive's shareholders or members. Captive laws require that one or more directors be a local resident of the state of domicile.  

A captive's board is best comprised of individuals who are knowledgeable about insurance, finance, law, and insured operations.  Board member expertise and knowledge is much more critical for group captives than for pure captives, due to their increased fiduciary responsibilities.

The captive's board is recommended to meet quarterly in any given year to review financial performance, approve service contracts, review claims, and develop short-term and long-term strategies.  

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