If a company requires alternative risk financing, its owners may choose to form a captive insurance company. The captive insurance industry was created to ensure a company or group of companies in the same or a similar industry against a specific company- or industry-related risk. For example, medical groups may create captives to supplement their malpractice insurance.
Although these companies pay themselves when they pay their premiums, they also risk their own capital because they must invest their own capital to start the captive and they are required by law to keep a specific amount of assets in case of an emergency or claim on the insurance policy. Although captives require a significantly lower capital infusion, their parent companies are not protected by the same regulations that traditional commercial insurers must abide by.
Captives are rewarded for reducing capital losses. Therefore, when a captive loses … Read More