Legal Definitions - captive insurance company

A captive insurance company is an insurance company that is wholly owned and controlled by its insureds. Its primary purpose is to insure the risks of its parent company or a group of related companies, rather than selling insurance to the general public. This arrangement allows the parent entity or group to manage its own insurance costs, customize coverage, and potentially benefit from underwriting profits and investment income that would otherwise go to a third-party insurer.

• Example 1: Large Corporate Risk Management

  A multinational technology conglomerate, "Innovate Global," operates numerous research facilities, manufacturing plants, and a vast fleet of vehicles across several continents. Instead of purchasing all its property, casualty, and product liability insurance from external commercial insurers, Innovate Global establishes its own insurance subsidiary, "InnovateSure Ltd.," domiciled in a jurisdiction known for supporting captive insurance. InnovateSure Ltd. then issues insurance policies directly to Innovate Global's various operating divisions, covering their specific and often complex risks.

  Explanation: InnovateSure Ltd. is a captive insurance company because it is owned and controlled by Innovate Global, and its sole purpose is to insure the risks of its parent company and its subsidiaries. This allows Innovate Global to tailor coverage precisely to its unique global operations, manage its risk exposure more directly, and retain control over its insurance program's financial performance.

• Example 2: Group of Businesses with Shared Risks

  A consortium of independent construction companies specializing in large-scale infrastructure projects decides to form "BuildSafe Mutual," an insurance company they jointly own. The purpose of BuildSafe Mutual is to provide professional liability and workers' compensation insurance to its member companies, who often face unique and high-cost risks that can be expensive or difficult to insure through traditional markets due to the specialized nature of their work.

  Explanation: BuildSafe Mutual functions as a captive insurance company because it is owned by the group of construction companies it insures. By pooling their risks and resources, the member organizations gain more control over their insurance premiums, claims management, and policy terms, which are specifically designed for the construction industry's particular challenges.

• Example 3: Non-Profit Organization Risk Management

  The "Global Humanitarian Aid Foundation," a large non-profit organization that operates relief missions in various high-risk regions worldwide, faces significant and unique risks, including political violence, kidnapping and ransom, and property damage in unstable areas. To better manage these risks and associated costs, the Foundation establishes "AidProtect Solutions," an entity wholly owned by the Foundation. AidProtect Solutions then provides various forms of specialized insurance coverage, such as political risk insurance, travel accident, and general liability for its personnel and assets in the field, directly to the Foundation's operational units.

  Explanation: AidProtect Solutions is a captive insurance company because it is owned and controlled by the Global Humanitarian Aid Foundation, and its exclusive function is to insure the risks of its non-profit parent. This arrangement allows the Foundation to customize its insurance coverage for highly specific and often unavailable risks, potentially reduce premium costs over time, and manage its self-insured retentions more effectively in challenging environments.