Three Captive Insurance Types You Should Know

An Overview of Captive Insurance Structures

Forming a captive insurance company is a great way for a corporation to reduce costs, customize its coverage, and have more control over its insurance. However, not all captive structures operate the same way.

In this post, we’ll provide an overview of the three main types of captive insurance structures: single parent, group, and cell captives. We’ll explain how each of them works, their relative advantages, and which ones are right for a given organization.

Captive Insurance in a Nutshell

Captive insurance is an arrangement in which a business takes control of its insurance coverage by forming its own insurance company. 

In this case, the parent company is not only insured by the captive but acts as its owner and operator. Meanwhile, the captive insurer exists solely to provide coverage and manage policies for its parent company.

How a captive operates, however, will depend on its structure. So, let’s take a closer look at the three main types of captives and how they function.

Need more details? Read:   What is Captive Insurance, Exactly?

Single Parent Captive

The majority of captive insurance companies are single parent captives.

As the name implies, this is a captive that is owned and operated by just one parent company.

It has a very straightforward structure. The captive provides insurance to the parent company. The parent company then pays premiums to the captive and submits claims to them, as they would with any insurer.

As the owner, the parent has a greater say over their insurance coverage. They can tailor policies with terms that wouldn’t be available from third-party providers. This customizability ensures comprehensive coverage while keeping premiums to a minimum.

When Is a Single Parent Captive Preferable?

Single parent captives are ideal for:

• Large corporations with the capital and revenue required to form a captive.
• Companies with heavy insurance costs, making the onerous process of establishing a captive worthwhile.
• Businesses with unique risk profiles that are inadequately covered by traditional commercial insurance policies.
• Companies with high levels of risk that want to avoid the exclusions and unfavorable terms found in third-party policies. 

Group Captive

A group captive is a captive insurer that has multiple parent companies. These companies typically have similar risk profiles and, as such, comparable insurance needs. This allows them to band together to form and operate a single captive, rather than create captives for each member of the group.

Group captives are typically managed by a governing board made up of representatives from each of the companies in the group. 

Under a group captive, the members share the risks and rewards. They will, for instance, pool the profits of the captive and spread out the costs. However, they also take on liability as a collective. For example, coverage limits will apply to the group as a whole, rather than each individual organization. If one member incurs a loss that exceeds the limit, that limit has been met for all other members as well, even those that have yet to file a claim. 

On the other hand, this shared structure can also act as a buffer. If one company sustains an unusually heavy loss, spreading the costs throughout the group lessens the blow on the individual member.

When Is a Group Captive Preferable?

Group captives are ideal for:

• Organizations where risks are high but not unique. This allows similar coverage to be applied across multiple members.
• Mid-sized corporations that don’t have the capital to form a captive on their own.
• Industries where losses are occasional but very costly, such as transportation.

Cell Captive

A cell captive can be seen as a middle ground between a group captive and a single parent captive.

Like a group captive, multiple companies come together to form a captive insurer. In this case, however, the captive insurer acts as an umbrella company for a series of smaller insurers.

Like a single parent captive, each of these smaller insurers handles policies and claims for a single member of the group.

Each of these cells operates independently of the others. Unlike a group captive, where profits and liabilities are pooled, each company has its own insurance coverage and separate financials. 

Under this arrangement, assets for each cell are kept fully segregated. The funds of one cell captive (including the premiums it collects from the insured) cannot be used to cover the claims and liabilities of another cell. 

Likewise, coverage limits and other policy terms only apply to one cell company and its captive, not the rest of the members.

While they are largely independent from each other, the cell captives do have some constraints. Since they operate under a larger umbrella captive, they share its overall structure. As such, they are overseen by the same captive manager and are registered in the umbrella’s domicile.

The umbrella captive handles regulatory oversight, reporting requirements, and many of the administrative functions, leading to cost savings for each of the cells. 

When Is a Cell Captive Preferable?

Cell captives are ideal for:

• Smaller corporations with limited resources – cell captives have the lowest cost of entry.
• Companies with differing risk profiles that want the advantages of captive insurance. Since each cell operates its own insurer, organizations from different industries can band together under the same umbrella captive.
• Organizations that want the control of a single parent arrangement without the burden of single-handedly founding a captive insurer.

Key Takeaways

• A single parent captive is a captive insurer wholly owned and operated by one parent company.
• A group captive is a captive insurer owned and operated by representatives from each member of its parent group.
• A cell captive consists of multiple insurers operating under a larger umbrella captive.
• Single parent captives have the highest cost to entry, followed by group captives, with cell captives being the most accessible option.
• Group captives allow companies with similar risk profiles to pool resources and share liabilities. 
• Although each member of a cell captive retains its own risks and liabilities, operating under an umbrella captive provides administrative benefits and cost savings.

Related articles:

• What is Captive Insurance, Exactly?
• What is a Fronting Agreement (And How Does it Work)?