8172 / What are the different types of captives?

Captives may take on a variety of different forms to provide the type of coverage desired by a particular business group.

A single parent captive, also referred to as a “pure” captive, is a captive company with a single owner. The captive provides insurance coverage only to this parent company (or related business group). Because pure captives provide insurance coverage only within the single business group, this structure provides the greatest degree of flexibility. Pure captives are exempt from many of the regulatory requirements, such as consumer protection regulations, that are applicable to other forms of captive entities.

The term “group captive,” on the other hand, refers to a category of captives where insurance coverage is provided outside of a single business group. This category of captives includes association captives, industrial insured captives, and risk retention groups. An association captive insures the risks of companies that are members of a single organization or industry. The risk and costs associated with providing this insurance are spread among the group, and the captive is either jointly owned by the association members, or is owned by the association as a whole.

Industrial insurance captives, as the name suggests, insure the risk of an industrial insurance group. Companies included within the group must meet certain size and operational requirements.

Risk retention groups are a form of captives created by the Product Liability and Risk Retention Act of 1986. Originally, these types of captives were formed to insure against risk of product liability litigation that was otherwise difficult to insure. Today, risk retention groups are more likely to be used among doctors, lawyers, hospitals, and other groups facing similar risk exposure. Risk retention groups allow members of an industry who face similar risk exposure to come together and form their own insurance company, which is preempted from certain state insurance regulation.

Single parent captives and group captives are funded by an entity that is insured by the captive. Agency captives, rent-a-captives, sponsored captives, and protected cell captives, on the other hand, are all types of captives that are funded by an unrelated entity, or “sponsor.” The sponsor then “rents” the services of the captive to various insured entities.

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Planning Point: These types of captives, while easy to form because they require no initial outlay of capital by the insured, offer the insured less control over the captive’s cost and operational structure.

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