Captive Basics

Basic Captive Diagram

This is the most basic captive arrangement, where a business pays insurance premiums directly to a captive.  There are many variations, however.  As the saying goes, “if you’ve seen one captive, you’ve seen one captive.” 

Captive with Fronting Insurer

In this captive arrangement, there is a licensed and rated “fronting insurance company” (a large insurance company) that writes the insurance to the business, and then reinsures some or all of the risks (along with the premiums) to the captive.  This arrangement is used frequently in workers’ compensation.

Captive Using Self-Insured Retention

If you have a large deductible in your general liability, workers’ compensation or other insurance policy, this captive structure can allow the business to pay tax-deductible premiums to the captive for that layer of “self insurance” while paying some premiums to the Large Insurance Company for catastrophic risks.   Benefits:  current tax deduction; asset protection; and enterprise risk management.  Also, if the assets in the captive are used as collateral for the Rated Insurance Company, the rates for the “excess” insurance may decline, provide additional costs savings.

Group Captive

In a group captive, several businesses in the same industry, association or franchise each pay insurance premiums to the group captive, which pools the premiums and losses.  Generally, each group member is an owner in the captive.  This allows insurance to be tailored precisely to the needs of the group, and can provide substantial insurance savings.

Growth of Captives