How Does Captive Insurance Work?

Companies considering establishing a captive insurance company often wonder “how does captive insurance work?” If your business is used to using traditional insurance markets and channels to meet its insurance coverage needs, it can be daunting to think of handling all of that through your own insurance company instead.

In this blog post, we’ll try to remove some of the mystery from the process, providing a high-level overview of how captive insurance companies work.how does captive insurance work

Different Options for Captive Insurance Structures

There are different ways companies can choose to structure their captive insurance programs, but the most straightforward is the single-parent captive insurance company. The business creating and owning the captive insurance program is known as the “parent” company, and they set up the insurance company as a wholly-owned subsidiary.

In certain cases, it makes more sense to choose a group captive (also called a risk retention group) or a protected cell captive. When you choose to work with Venture Captive Management, we will work closely with you to help you understand the options so you can determine which structure makes the most sense based on your business.

Established in a “Captive-Friendly” Jurisdiction

It’s important to ensure regulatory requirements for insurance companies are met and adhered to, so the insurance company must be established as a licensed insurer in a “captive domicile” – a U.S. state or foreign country with laws that allow for captive insurance programs.

After it’s been established, the parent company decides which risks it wants the captive insurance company to handle. This might include worker’s compensation, general liability, professional liability, employee benefits high deductible plans, property insurance high deductible plans and others.

Managing Insurance Administration

The captive insurance company then is responsible for underwriting or evaluating the risk, writing insurance policies, determining premium amounts, collecting premium payments and administering and paying claims.

Premiums received that are not paid out as part of the claims administration process can ultimately go back to the parent company. Of course, there may be years when claims exceed premiums collected. The parent can either choose to retain the risk of self-insuring or can re-insure some or all of that risk through another insurance company, in which case the reinsurer pays (if applicable) or the parent company must pay the claims out of their reserves.

Captive insurance companies need a mechanism in place for claims management. The claims management process needs to be able to handle the anticipated volume and types of claims.

Financial Management for Captive Insurance Companies

Because the financial management of your captive insurance company will impact your company’s financial well-being, it’s an important function. Businesses establishing captive insurance programs must “fund” them, showing their ability to meet the risks of the policies they have underwritten, and should monitor and manage the company’s financials on an ongoing basis.

Find Out How an Insurance Captive Works for Yourself. Contact Venture Captive Management.

There are many reasons to consider a captive insurance company. Don’t let fear of the unknown hold you back. To learn more about how captive insurance works, contact Venture Captive today at 770.246.8535.