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Captive Insurance Companies

An FEI member from a mid-sized healthcare company recently asked, "What are the advantages and disadvantages of using a captive insurance company instead of traditional insurance?"

The Researcher found a very informative Web site, Captive.com, "The Business to Business Risk & Insurance Exchange," www.captive.com. This site has a number of interesting features, including a "Captive Basics" link that defines and describes captive insurance organizations:

"Captive insurance organizations include insurance companies that are owned and controlled by their insureds. A captive insurance company is described as single parent captive if it is owned and controlled by one company and insures that company and/or its subsidiaries.

"A group captive, on the other hand, is an insurance company owned and controlled by two or more non-affiliated organizations the captive insures. A group captive can be either homogeneous and insure similar types of businesses risks, or non-homogeneous, and insure risks of several types of organizations. In the U.S., group captives are licensed by a domiciliary state and use a fronting carrier, or they operate under the Federal Risk Retention Act. The companies may be stock, reciprocal or mutual in organizational form."

Captive.com also has an "Ask the Expert Forum" that offers frequently asked questions about captives. "Captive Explorer" is an interactive tool that allows users to develop their own examples.

The Researcher also found "Your Risk Management Angel," an article from the April 1999 issue of The CPA Journal: www.nysscpa.org/cpajournal/1999/0499/Features/F280499.HTM

This article discusses the advantages of captive insurance companies, describes the current state of the captive market, provides information on reporting requirements and taxation and how to avoid adverse tax consequences, and tells companies how to set up a captive.

Among the compelling advantages it points out:

* Meeting unique insurance needs.

* Providing a self-funding mechanism.

* Reducing the impact of the insurance industry's underwriting price cycles.

* Taking advantage of the favorable experience and thereby reducing the cost of managing their risk. Conventional insurers may not take into account the full effect of an insured's good experience when pricing risk. Companies with low loss ratios on property risks may pay premium rates very similar to those of their competitors with high ratios.

* Providing...