The Different Types of Captive

1. Pure Captives

A Pure Captive, sometimes known as a single parent captive, is an insurance subsidiary that only provides insurance to cover the loss exposures of its parent. Whilst no insurance risk is transferred out of the organisation other than by way of reinsurance to protect the captive, a pure captive allows a company to monitor its operational risks, review its loss exposures and to provide efficient claims management to its subsidiaries. When the parent company is assuming the additional risk, it is more likely to better control its loss exposures and achieve claims savings, at the same time reducing its premiums.

2. Group Captives

A Group Captive is a captive that is owned by a number of different parents who are normally from the same industry. Companies often elect to use a group captive when

1. They wish to reduce their start-up costs.
2. They are prepared to pool their risk.
3. They do not have a large enough volume of premium to make a stand-alone captive economically viable.
4. They wish to access underwriting talent that would be otherwise expensive and time consuming to put together.

Group captives have a drawback which is that profits can be impacted by the poor performance of any single party and therefore group captives often employ independent underwriting managers to accept and decline business. Having different members with separate requirements can lead to differences of opinion.

3. Association Captives

An Association Captive is similar to a group captive except that it is sponsored or owned by an association, which is normally homogenous in nature.

4. Risk Retention Groups

Risk retention groups are a form of group captive formed under the Liability Risk Retention Act of 1996. This law allows a group of people to form a risk retention group providing that they are all owners, from the same industry and are not writing personal lines or workers compensation business. Risk retention groups are licensed as insurers by individual states and avoid the need to obtain a front company to put in front of a captive.

5. Rent-a-Captives

A rent-a-captive is an arrangement whereby a capital base is accessed by a third party that wishes to form a captive but without the cost or time involved in having to incorporate a separate entity. Often renting a captive is a first step towards the formation of a single parent, group or association captive as these can be formed over a period of time whilst the owners are developing the captive's business through a rent-a-captive but with much less cost. Rent-a-captives usually earn fees based on the volume of income being ceded, typically around 2.00%-4.00% of premium ceded subject to a minimum amount of around $15,000 per year.

One of the key issues to a rent-a-captive owner or manger is to ensure that the capital base is not at risk from a poor loss ratio of any of its users. This can only be accomplished by ensuring that there is no financial risk to the rent-a-captive from any of its users. In order to achieve this the captive owner is required to purchase a combination of specific and aggregate reinsurance as well as to provide collateral to bridge the difference between the net premium to the captive and the point at which the aggregate cover applies, commonly known as 'the Gap'.

6. Protected Cell Captives

Protected Cell Captives (PCC's) are similar to Rent-a-Captives except that the assets of each user are protected from one another by law. Each user is referred to as a 'cell' and the operation of each cell is controlled through a cell user's agreement with the captive. As the supporting capital base of the PCC is still at risk, part of this operating agreement normally requires cell users to collateralize any risk gap (the amount between premiums and the point at which reinsurance attaches) to the captive.

Also known as segregated cell captives, PCC's originate from Europe where the Protected Cell Ordnance was passed in Guernsey on 1 January 1997. Since then most of the major captive domiciles have introduced legislation to allow PCC's to operate and although PCC's have yet to be tested in a court of law, they are becoming increasingly popular.