Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or companies. Captive insurance is essentially an “in-house” insurance company with a limited purpose and is not available to the general public. It is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured.

Companies both large and small are having an increasingly difficult time finding and affording traditional insurance policies to cover their risks and assets. Premiums are increasing at a steady clip, making insurance coverage nearly cost prohibitive for most companies, leaving them vulnerable to catastrophic loss. Some companies have risks that are difficult or impossible to cover. Increasingly, traditional insurance companies are setting up their credit rating structures without considering actual loss experience, but rather, trends in the market, making it difficult for many companies to qualify for coverage. Another stumbling block for companies is that they might have insufficient credit for deductibles and exercise poor loss control, which in turn makes them ineligible for coverage.

There are five basic types of captive insurance. The first is the most prevalent, the Single Parent Captive, in which an insurance or reinsurance company is formed simply to insure the risk of a parent company or its affiliates, which are not insurance companies. The Association Captive is an insurance company which is formed and owned by an industry, trade or service group strictly for the benefit of its members. The Group Captive is owned by a group of companies and provides them with a captive insurance company for a shared insurance need.

An Agency Captive is a reinsurance company owned by a separate insurance company to reinsure their client’s risks. Reinsurance is a type of insurance in which insurance companies share the burden of a catastrophic loss with other insurance companies, usually on a global basis. Put simply, an insurance company buys insurance to cover their own loss when their claims are devastatingly high. The last type of captive insurance is the Rent-A-Captive, which provides the benefits of a captive insurance company for a fee to small companies which may not have the resources to form their own captive insurance company.

The financial benefits of captive insurance are significant. Premiums tend to be lower simply because, with commercial insurance, premiums are padded to cover the insurance company's own profit margins and overhead costs. With captive insurance, companies are not attempting to make a profit, but simply to provide themselves with low cost insurance coverage. Captive insurance is more flexible than traditional insurance, because the company can adjust the proportion of assumption of risk or the amount of reinsurance depending on how soft or hard the market is.

Another benefit of captive insurance is in claims management. With “in-house” insurance, a company cuts through the red tape and bureaucracy associated with traditional insurance companies. The parent company can dictate the procedure by which claims are processed. Perhaps one of the biggest benefits is that excess net premiums can be recouped by the parent company when claims are low, and they can increase reinsurance in riskier areas.

Like traditional insurance, captive insurance can cover several types of risk. Captive insurance can underwrite public and product liability, physical property damage, professional indemnity, employee benefits such as medical aid and employer’s liability.