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Captive insurance companies serve as an alternative to commercial insurance. According to the National Association of Insurance Commissioners (“NAIC”), a captive insurer is defined as “a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies).”

Captive Insurers - Captive Insurance CompaniesReasons to form a captive insurer generally include specialized needs for cost reduction and risk management. Captives can be useful when commercial insurance becomes expensive or market participants lack accessibility to coverage.

Wholly owned and operated by insured members who invest their own capital, captives are a form of self-insurance. Once created, a captive acts in a manner similar to insurance companies in that it writes policies, collects premiums, and settles claims. Captives are licensed at the state level by a State Insurance Commissioner.

Vermont, a leader in domestic captives, added 33 new captives in 2015 to remain the largest domestic domicile. Of the 33, 11 were re-domestications from other jurisdictions, bringing the total to 588 active and 1,062 total licensed captives.

Several other states recently announced 2015 increases in their base of captive insurers, including those listed below.

  • Hawaii added 19 captives in 2015 for a total 197
  • North Carolina added 42 in 2015 for a total 336
  • Oklahoma added 26 for a total 73
  • South Carolina added 30 for a total 167
  • Texas added 11 for a total 21
  • Tennessee licensed its 100th captive in 2015
  • Delaware (the third-largest domestic domicile) licensed its 1,000th captive

Globally, captives continue to grow, with Bermuda adding 22 new captives in 2015, for a total 797 active entities.

Some states, like Georgia, are amending current laws in regard to captive insurers in an effort to make it easier for the state to attract more entities. The Georgia law regulating captive insurers, in effect since 1988, was viewed by industry experts as being one of the strictest in the country.

Some of the biggest proposed changes in Georgia include a reduction in the premium tax on all captives to 0.4 percent of the first $20 million and 0.3 percent on every dollar thereafter of direct premiums collected. A reduction in minimum capital and surplus requirements is also being proposed.

According to the NAIC, there are multiple forms of captive insurers. Some of the most common types of captive insurers include:

  • Single-parent (or “pure”) group/association captives. In this case one corporate entity creates a dedicated captive for risk management purposes.
  • Association captive. In this case a trade or industry association creates a captive insurer to meet the insurance needs of its members.
  • Rent-a-captive. These captive insurers offer their services and the availability of a license for a fee.
  • Risk retention groups (“RRGs”). (While not all RRGs are captives, some RRGs are organized as captive insurers.)

There are also many additional forms of captives, depending on the industry and risk requirements. Variations include agency captives, branch captives, producer owned reinsurance companies (PORCs), sponsored captives, and industrial insured captives.

Since the establishment of the first captive in 1962, worldwide industry growth has been steady. Today there are an estimated 6,000 captive insurers globally, including approximately 3,000 in the United States.

With an estimated 30 U.S. states now home to some form of captive, insurance industry experts expect to see continued growth within the industry.

About The Author

Bill Hager is an insurance and reinsurance expert and arbitrator. He is President of Insurance Metrics Corp. and also an elected member of the Florida House of Representatives, where he serves on the Insurance and other committees.

Mr. Hager is a former Insurance Commissioner for the State of Iowa, and former President of NCCI, Inc., the nation’s largest workers’ compensation rate corporation.

As a regulator for eight years in five positions ((i) Assistant Attorney General assigned to the Department of Insurance, (ii) First Deputy Commissioner of Insurance, (iii) Iowa Commissioner of Insurance, (iv) Administrative Law Judge, and (v) Executive and Member of the National Association of Insurance Commissioners), Mr. Hager, along with his staff, approved (or disapproved) of the language of most all insurance policies used by each of the 1,500 insurance companies doing business in the state.

This regulatory action also included the approval of policy application forms.

Disclaimer

In all of the general statements here, see the state law of the controlling jurisdiction. Every case is different and circumstances vary widely depending on the governing state law, policy provisions, and related considerations.

This blog is provided for educational purposes only. It is not intended to provide legal advice or an opinion in regard to any topic discussed. The blog should not be used as a substitute for legal advice from a licensed attorney in your state.