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Types of Captives

In its simplest form a captive is a wholly owned insurance subsidiary, insuring some of the risks of its parent and affiliates. Since captives were first formed, the captive model has developed to provide appropriate vehicles for a wide range of different owners and users.

Types of Captives

Pure captive – This type of captive insures only the risks of its parent company or related group companies.

Diversified captive – In addition to the above group risks, this captive also underwrites unrelated risks, which may allow the captive to become a new profit center.

Group captive – This is an insurance company that covers the risks of a group of companies that has come together to share risk, to benefit from peer group risk management experience and to leverage combined purchasing power, particularly in the reinsurance market to which individual group members would not have access.

Association captives – These are established by an industry or trade association to meet the insurance needs of its members.

Agency captive – This type of captive is often formed to enable an insurance agent or broker to participate in high-quality risks and increase revenues.

Rent-a-captive – A rent-a-captive is an arrangement in which a sponsor provides the capital for a captive company, which is then accessed by clients to write captive insurance business. The clients pay a charge to the sponsor for the 'rent' of the capital. Today, most rent-a-captives are structured as cell companies.

Segregated Portfolio/Protected Cell Company – This company is often known as a “Cell” captive and is set up with a “core”, which usually doesn’t take risk, and various segregated portfolios (cells), which assume individual risks. The assets and liabilities of each cell are segregated from each other by law. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participation agreement. This is a useful vehicle for those programs not large enough to set up their own captive or that do not wish to manage their own captive.

Risk Retention Group – The Federal Risk Retention Act permits the formation of a Risk Retention Group, an insurance company licensed in one state and allowed to write business in all states without going through the full filing requirements to get licensed there. An RRG must be owned by its insureds and can only write liability business.