Legal Definitions - captive insurance

Captive insurance refers to an insurance company that is wholly owned and controlled by its primary insureds. Instead of purchasing all its insurance from a third-party commercial insurer, an organization or a group of related organizations creates its own insurance subsidiary to cover its specific risks. The main purpose of a captive insurer is to provide insurance coverage for its parent company or member organizations, allowing them to manage their own insurance costs, customize coverage, and potentially benefit from underwriting profits and investment income that would otherwise go to a commercial insurer.

Here are some examples illustrating captive insurance:

• Example 1: A Multinational Corporation

  A large technology conglomerate, Innovate Global Inc., operates numerous research facilities, manufacturing plants, and sales offices across several continents. They face a wide array of risks, including property damage, product liability, and employee workers' compensation claims. Rather than relying solely on external commercial insurers for all these complex and varied risks, Innovate Global Inc. establishes its own insurance company, GlobalShield Assurance, in a jurisdiction known for captive insurance. GlobalShield Assurance then issues insurance policies directly to Innovate Global's various subsidiaries and divisions, covering their specific operational risks. This arrangement allows Innovate Global to tailor insurance policies precisely to its unique global operations, potentially reduce overall insurance costs by retaining underwriting profits, and gain greater control over its risk management strategies.

• Example 2: A Group of Independent Businesses

  Consider a consortium of independent trucking companies, Roadway Logistics Alliance, which collectively faces high and volatile premiums for auto liability and cargo insurance from traditional insurers. To gain more stability and control over their insurance expenses and coverage terms, these trucking companies decide to form a shared captive insurance company called FreightGuard Mutual. Each member company becomes a shareholder in FreightGuard Mutual and pays premiums to it. FreightGuard Mutual then underwrites and issues the necessary liability and cargo policies to its member trucking companies. This allows the alliance members to pool their risks, negotiate better terms, and potentially share in any profits if claims are lower than expected, rather than those profits going to a commercial insurer.

• Example 3: A Large University System

  A major university system, United Academic Institutions, which includes multiple campuses, research hospitals, and athletic facilities, faces significant and unique risks such as professional liability for medical staff, property damage to historic buildings, and general liability for student activities. Instead of purchasing all its insurance from external providers, the university system creates its own captive insurance entity, CampusSecure Solutions. CampusSecure Solutions provides specialized coverage for risks specific to academic and healthcare environments, such as medical malpractice for its teaching hospitals and unique property risks for its extensive real estate portfolio. This strategy enables United Academic Institutions to design highly customized policies that address the specific needs of its diverse operations, potentially reduce premium costs over time, and have greater transparency into its claims history and risk profile, ultimately supporting its educational and research missions more efficiently.