Captive Insurance Company

Example

“Disney formed a captive insurance company in Vermont to self-insure many of its theme park risks and reduce reliance on commercial insurance markets.”

Memory Tip

Think 'CAPTIVE = Company Acts as Parent's Total Insurance Vehicle Enterprise' - the parent company owns its own insurer.

Why It Matters

Captive insurance companies can significantly reduce insurance costs for large organizations while providing better control over claims handling and risk management. They also offer tax advantages and the ability to profit from good loss experience, as the parent company retains underwriting profits instead of paying them to commercial insurers.

Common Misconception

Many believe captives are only for huge multinational corporations, but they can benefit mid-sized companies with annual premiums of $200,000 or more. Another misconception is that captives eliminate all commercial insurance - most captives still purchase reinsurance and commercial coverage for catastrophic risks.

In Practice

A manufacturing company with $2 million in annual insurance premiums forms a captive insurance company. Instead of paying premiums to commercial insurers, they pay $1.8 million to their captive, keeping $200,000 for operational costs. If claims total only $1.2 million instead of the expected $1.6 million, the parent company retains the $400,000 underwriting profit. Over five years with good loss experience, this could save $1-2 million compared to commercial insurance while providing better claims control.

Etymology

Combines 'captive' meaning controlled or owned by another entity, with 'insurance company,' creating the concept of an insurer that is 'captured' or owned by its primary customer.

Common Misspellings

Related Terms

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