Admin's other articles

4349 The World without Bankruptcy Laws

Bankruptcy is one of the natural states which a company may find itself in. Entrepreneurship is primarily about taking risks. When companies take risks, some of them succeed, whereas others fail. Hence failure is a natural part of the business. However, many critics of bankruptcy laws believe that there isn’t a need for an elaborate […]

4348 The Wirecard and Infosys Scandals are a Lesson on How NOT to Treat Whistleblowers

What is the Wirecard Scandal all about and Why it is a Wakeup Call for Whistleblowers Anyone who has been following financial and business news over the last couple of years would have heard about Wirecard, the embattled German payments firm that had to file for bankruptcy after serious and humungous frauds were uncovered leading […]

4347 Why the Digital Age Demands Decision Makers to be Like Elite Marines and Zen Monks

How Modern Decision Makers Have to Confront Present Shock and Information Overload We live in times when Information Overload is getting the better of cognitive abilities to absorb and process the needed data and information to make informed decisions. In addition, the Digital Age has also engendered the Present Shock of Virality and Instant Gratification […]

4346 Why Indian Firms Must Strive for Strategic Autonomy in Their Geoeconomic Strategies

Geopolitics, Economics, and Geoeconomics In the evolving global trading and economic system, firms and corporates are impacted as much by the economic policies of nations as they are by the geopolitical and foreign policies. In other words, any global firm wishing to do business in the international sphere has to be cognizant of both the […]

4345 Why Government Should Not Invest Public Money in Sports Stadiums Used by Professional Franchises

In the previous article, we have already come across some of the reasons why the government should not encourage funding of stadiums that are to be used by private franchises. We have already seen that the entire mechanism of government funding ends up being a regressive tax on the citizens of a particular city who […]

See More Article from Admin

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout.

Visit Us

Our Partners

Search with tags

  • No tags available.

In the previous article, we have studied about the concept of captive insurance companies. We have also enumerated the various advantages of using captive insurance companies over traditional insurance companies. However, there was an underlying assumption that all captive insurance companies are the same. That is not the case! There are various types of captive insurance companies in existence.

In this article, we will have a closer look at the different types of captive insurance companies that are present in the marketplace.

Single Parent Captive Companies: These are the most basic level of captive companies there are. As the definition suggests that these insurance companies are fully owned subsidiaries of their parent company. Also, the parent company along with other subsidiaries may be the only clients that a single parent captive company is allowed to have.

The contract between the captive and the parent company is not different from a standard insurance contract. It is just that both the companies actually belong to the same group. This means that there is no real transfer of risk which is taking place. In essence, the parent company is insuring its own risk and using the captive as a shield to obtain many tax advantages.

Affiliate Captive Companies

There are many laws governing the functioning of captive insurance companies as well. In many states, some of these laws do not allow a single parent company to sell insurance to its unrelated affiliates.

For instance, if a steel manufacturing company also has a chain of restaurants, some states will not allow the single parent captive to sell insurance to both. There is a different form of captive company that is allowed to serve both such companies.

The only difference between the affiliate captive and the single parent captive is the number of clients they serve. In all other respects, these companies can be considered to be identical.

Rent- A- Captive Insurance Company

The rent-a-captive alternative is usually used by smaller companies. Captive insurance companies offer many benefits. However, there are also a lot of costs to run an insurance company.

Firstly, licenses have to be obtained. Then rules have to be followed regarding how the capital is allocated once premiums are received.

Lastly, a lot of paperwork needs to be done to ensure that the captive company is compliant with the regulations that need to be followed. All of this obviously requires a lot of time and effort and also a lot of money needs to be spent.

This is where the rent-a-captive concept comes in handy. These are basically captive companies that are already in existence and have been created by insurance companies such as AIG, Liberty or Zurich. They take care of all the licensing, procedure and paperwork.

Clients just have to park their money as premium and withdraw it in the form of claims or dividends. Rent-a-captives provide services to multiple clients. However, every client faces only their own exposure. This means that the funds are not really being pooled but instead just being held by rent-a-captive companies.

Group Captives

Group captives are not pure captives. This is because when companies pay their premium into a group captive, they are pooling their funds with others. They are not really insuring only themselves. Instead, they are insuring a lot of other people who may have something in common.

For instance, some group captives provide insurance only to doctors. Others may provide insurance only to ambulance drivers and so on.

In such cases, any group can start a captive insurance company. However, as per law, it is necessary that the group must have been in existence for at least one year. Group insurance companies only accept premiums from members who are also shareholders. If a person is not a shareholder, they cannot be insured by group captives.

The problem with group captives is that people lose money because of the negligence of other members of the group. Hence, if anybody makes a claim, all members of the group have to pay out. In a poorly managed group, people who are prudent about their risk management eventually end up quitting the group.

On the other hand, the ones left in the group are those who would not get insurance anywhere else in the open market. Hence, the problem of adverse selection is built into these captive groups. When people have problems with captive insurance, they are usually referring to captive groups.

Risk Retention Groups

Risk retention groups are like captive groups with two important differences.

  • Firstly, risk retention groups have to be registered under federal law. Hence, once they are incorporated in a given state, they are then allowed to continue with their business in the other 49 states
  • Secondly, risk retention groups are allowed to sell insurance to people who are not shareholders. Who they can sell insurance to is determined by their bylaws. Hence, in many ways, risk retention groups function like regular insurance companies.

To sum it up, there are many types of captive insurance companies, and each serves a specific purpose.

Article Written by

Admin

Leave a reply

Your email address will not be published. Required fields are marked *

Related Posts

Why the Digital Age Demands Decision Makers to be Like Elite Marines and Zen Monks

Admin

Personal Grooming Tips for Women

Admin

Politics in Virtual Workplace

Admin