Captive Insurance Companies: Your Risk Management Angel

By Shayne, Lewis Kenneth | The CPA Journal, April 1999 | Go to article overview

Captive Insurance Companies: Your Risk Management Angel


Shayne, Lewis Kenneth, The CPA Journal


In Brief

Doing Your Own Thing

Companies are always evaluating the options available to meet their insurance needs, and more and more organizations are seeking alternatives to traditional coverage. A captive insurance company offers a nnmber of advantages and may provide a tempting alternative to purchasing insurance from conventional insurance companies. Captive insurance companies are often less regulated than conventional insurance companies,

and domestic captives are taxed differently for both Federal and state purposes. Businesses considering forming captive insurance companies have to analyze the tax and financial consequences of such a move, select a location that best suits their needs, and determine whether establishing a pure or group captive is more appropriate.

A captive insurance company is a closely held insurance company whose business is primarily supplied by and controlled by its owners. Captives are insurers owned by the insureds and organized for the main purpose of self-funding the owners' risks. The shareholders/insureds actively participate in decisions influencing the underwriting, operations, and investments of a captive insurer. Most jurisdictions allow two types of captives:

* Pure captives, entities wholly owned by one parent and its affiliated companies, and

* Group captives, entities owned by a small number of substantially sized, unaffiliated entities that are generally in the same type of business, e.g., accounting firms.

Advantages of Captives

As the worldwide business community becomes more sophisticated in analyzing and understanding risk exposures and the available alternatives for risk management, captives can often provide an attractive alternative to purchasing insurance from conventional insurance companies.

Captives can be organized for any number of reasons. They are used by many Fortune 500 companies and some much smaller enterprises. Captives' parents are engaged in all types of business activity: industrial, energy, medical, retail, and professional.

Some of the reasons for forming a captive include the following:

* To meet unique insurance needs;

* To provide a self-funding mechanism;

* To reduce the impact of the insurance industry's underwriting price cycles;

* To take advantage of the favorable experience and thereby reduce the cost of managing their risk. Conventional insurers may not take into account the full effect of an insured's good experience when pricing risk. Companies with low loss ratios on property risks may pay premium rates very similar to those of their competitors with high ratios;

* To provide opportunities for the organization to improve risk controls by centralizing the risk management function; and

* To increase control over funds flowing through the organization, through possible tax benefits and a reduction in the cost of risk management.

Regulation

Captives are generally subject to less regulation than conventional insurance companies for the following reasons:

* The owner of a pure captive must be a large sophisticated financial entity-measured by a minimum net worth and meeting other application criteria

* Captives are self-insurers: They exist to cover the parent company's risks.

* Captives cannot sell direct coverage to persons or entities other than their owners and affiliated entities

* Captives cannot provide direct coverage, even to their parents and affiliated companies, if such coverage is required by law (e.g., workers' compensation or automobile liability).

Current State of the Captive Market

The total amount of premiums written through the captive insurance market is sizable and growing. Based on the captive insurance directories issued by Tillinghast-Towers, in 1997 total premiums were $18 billion, capital and surplus were $45 billion, and investable assets were almost $104 billion.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Captive Insurance Companies: Your Risk Management Angel
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.