What is a captive insurer?
An insurance company owned by the organisation it insures, established so that a business can insure its own risks rather than buying cover from a commercial insurer.
Why an organisation would do this:
Cost. A commercial premium includes the insurer's expenses, commission, profit margin and cost of capital. For an organisation with predictable, well-managed losses, retaining the risk and paying claims from its own captive avoids all of that — the premium effectively stays within the group.
Access to reinsurance. A captive can buy reinsurance directly, at wholesale rates, rather than buying retail insurance. This is frequently the principal financial attraction.
Cover unavailable commercially, or available only at prohibitive cost — particular liabilities, or risks the market has withdrawn from.
Cash flow. Premiums are retained and invested until claims are paid.
Risk management incentive. Because losses are borne directly, the organisation has a sharpened interest in reducing them — and captives are frequently associated with genuine improvements in loss prevention.
Tailored terms, negotiated internally rather than accepted from a market wording.
Data, since the captive sees every claim in detail.
The forms:
Single-parent captive, insuring one group.
Group or association captive, owned by several organisations in an industry.
Protected cell company, where separate cells with segregated assets allow smaller participants to use a shared structure.
What it requires. A captive is a regulated insurance company — requiring capital, governance, actuarial and accounting support, regulatory compliance and ongoing cost. This is why it suits large organisations and is uneconomic below a substantial scale of premium.
Domicile matters, and captives are frequently established in jurisdictions with regimes designed for them.
The genuine risks:
Retained risk is real risk. A severe loss falls on the group rather than on an insurer, so a captive must be adequately capitalised and must buy reinsurance above its retention.
Tax scrutiny. Arrangements must involve genuine risk transfer and be priced on arm's-length terms; authorities examine captives closely where they appear to be tax-motivated rather than risk-motivated.
Concentration, since the insurer's fortunes are tied to the parent's.
General information, not advice.