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Captive Insurance Industry Background, History and Value

For a short history on captive insurance see, "History of Captive Insurance." Captive insurance today is important to sophisticated companies in every industry. While 90% of the Fortune 500 have one or more captive insurance companies, less than 5% of the 10,000 or more successful smaller to mid-market US based companies have yet to learn about the benefits of captives. They are more widely known in the European Union where the use of captive insurance originated. Non-profits, trade associations and even government bodies are forming captive insurance companies.  If you are unclear about what a captive insurance company is, click here. 

Captive Industry Background & Emergence


Through the years, traditional insurance has been the primary method for organizations to deal with the financial effects of hazard risk. The simple pooling mechanism of traditional insurance remains one of the most efficient methods of reducing the effects of risk on an organization./1 However, simple pooling is costly for organizations with good claims history, is not available to cover many types of risks, excludes coverage under many conditions, and does not allow true customization of policies to meet an organization's specific and unique needs. Importantly, you also lose 100% control of your "risk capital" up front when buying traditional commercial insurance. It is the easiest, least sophisticated, and usually most expensive method of risk management. The administrative costs and profits of traditional insurance is high for companies with well managed risk.

The captive insurance industry emerged to address deficiencies and inefficiencies of traditional pooled insurance programs. Captives are also a sophisticated way to build asset reserves with pre-tax dollars to cover self-insured risks whether market policy deductibles and exclusions or any of the many varieties of risk knowingly or unknowingly self insured. See Types of Risk for more information.

In recent years, captives have become a significant part of the global insurance landscape primarily due to insurance industry experts creating service provider firms that help organizations form and operate their own private insurance company. 

Captive insurance company assets are savings set aside to protect  third parties against loss and protect the captive owner from risks that could jeopardize its capacity to remain in business. Ultimately the captive insurance industry is helping protect the public and jobs from risks of loss and damage in a more efficient and broader scope  of risk coverage than traditional insurance companies can. 

Value and Importance of the Captive Insurance Industry

Improved risk finance efficiency helps protect you and benefits the general public. Increased strategic use of captives makes the insurance industry more efficient, stronger, and better able to compensation those suffering hardship or loss. And there is greater incentive to control loss from risk when a captive insurance company is part of your risk management process over simply buying traditional insurance coverage. Critics of the captive industry overlook this and many other compellingly benefits of the maturing captive insurance industry.
Preparing for unexpected loss has always been important. Captives are the newest sophisticated tool in the arsenal to plan for and manage loss efficiently and effectively. Captives give you great control and flexibility over your risk and loss management assets and resources by addressing your specific needs and circumstances.

Captives also play a larger societal role. They are helping build a stronger and more efficient global economic system for our children. By helping people and organizations better plan, manage and save for risks, captives are playing a vital role by encouraging increased investment in our future. They help keep traditional insurance companies more competitive as well.

Captives are a Significant Growing Part of the Insurance Landscape

Every captive insurance company is uniquely designed to achieve special goals and objectives. Captives are a mature risk transfer and finance vehicle utilized throughout the world. Captives routinely do business with large traditional insurance companies. In fact, many large insurance companies have formed their own captives.  As the captive industry matures, transactions between unrelated captives will be increasingly common including increased merger & acquisition activity to achieve further efficiencies. Someday perhaps a publicly traded stock and bond investment classification for captives will emerge , bringing with it increased investment and wider ownership in captives. 

Learn More:
Our "Captives 101" mateial helps you begin assessing if a captive insurance company or other alternative risk transfer and finance structure makes sense for you or your clients.

1/ Alternative Markets: Structural and Functional Evolution, Corning Research & Consulting, Inc., 2006.

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