8171 / What is captive insurance?

In its simplest form, captive insurance is insurance that is provided within a corporate group, through a subsidiary that is controlled by a parent company. Instead of purchasing insurance from an external commercial insurance company, the parent company manages the risks of the corporate group through the subsidiary. The captive then either reinsures these risks or retains the risks itself. As with a traditional insurance policy, the parent company (or group of companies) pays premiums to the subsidiary providing coverage. See Q 8172 for variations on this basic form of captive insurance.

Captive insurance may be used for a variety of reasons. Many times it can be used when a company has risks that are difficult or impossible to cover with traditional insurance. The parent company is often able to save substantially on premium costs by using captive insurance because traditional insurance companies charge higher premiums to cover their own costs and turn a profit. Using captive insurance allows the insured entities to pay only for coverage, retaining any profits within the corporate group. Further, the corporate group controlling the captive is able to retain control over how any insurance profits are invested and managed. While the tax benefits of captive insurance are often not the primary motivator for using a captive insurance structure, they can provide motivation for forming a captive, instead of using commercial insurance. See Q 8173, Q 8174 and Q 8181 for the tax considerations applicable to captive insurance companies.

While captives are typically used to insure against general liability or workers’ compensation risks, they can also be used to cover more obscure risks (such as terrorism-related risks) that are much more difficult to insure through traditional commercial insurance. Larger corporations may form multiple captives to insure against different risks, rather than pooling all risks together within a single captive.