Education & Resources
Types of Captives
While there are many variations to the structure of a captive insurance company, captives can be separated into the following basic categories. Note, this section is only a summary and does not analyze the merits of each type of captive.
Single-Owner Captives
These captives are set up and operated by a single owner to insure its own risks and the risks of its subsidiaries and affiliates. Many single-owner captives provide coverage for other, non-related organizations. Single-owner captives that insure only the risks of the owner or the owner’s subsidiary operations are termed “pure” captives.
Group Captives
These captives are owned by multiple, non-related organizations (policyholders) and are initially set up to insure the risks of the owners. These risks are usually, but need not be, similar in nature. Many provide coverage for organizations other than those affiliated with the owners. Types of group captives include:
Cash Flow
With underwriting stability along with the ability to reduce costs and manage claims along with the timing of premium payments to best suit the parent can provide significant cash flow benefits not available in the conventional market.
Profit Center
Captives are often able to create a new profit center. For instance, the level of underwriting profit on premiums paid by related parties is generally set by captive owners. Moreover, many captives can earn investment income by investing the net premiums retained.
Coverage Availability
A captive can expand the scope of insurance coverage for all of its insureds. Sometimes, it can offer better terms than commercial insurance carriers. Alternatively, a captive may provide coverage for risks that are commercially uninsurable, or even uneconomical.
Rent-a-Captives
These are captive insurance companies owned by an organization that is not one of the policyholders, such as a broker, a reinsurer, or a fronting insurance company. The fees to enter one of these facilities are less than the initial capital requirements of a single-owner or group captive. However, they do not offer as much flexibility regarding coverage and/or limits, and have varying degrees of safety depending on the sponsor and the types of risks and insureds the captive insures. A principal disadvantage is that a rent-a-captive is at risk for policies, which were written by every person associated with that particular captive since its formation and its usual light capitalization.
Protected Cell Companies (PCCs)
Also known as “segregated portfolio companies” or “segregated account companies” in some domiciles, PCC status allows a captive to segregate accounts so that each account is legally protected from the liabilities of other accounts within the captive. Used with a rent-a-captive, PCCs can protect a participant in varying degrees, depending on the jurisdiction and the nature of the corporate agreements among the shareholders and cell members, from the adverse experience of other participants, limiting them from risk-sharing without having to form their own captive.
The disadvantages of such may include (depending on domicile) the need to coordinate matters among multiple owners and the uncertain tax status of the individual cells.
Special Purpose Captive
A special purpose captive insurance company is a catchall category which covers all remaining captives that are not defined by any other statutes – which is usually owned or controlled by a parent company and may only insure the risk of its parent or its economic family.
Series LLCs and Cell Companies
Treasury recently released proposed regulations regarding the classification for Federal tax purposes of a series of a domestic series limited liability company (LLC), a cell of a domestic cell company, or a foreign series or cell that conducts an insurance business. The proposed regulations provide that, whether or not a series of a domestic series LLC, a cell of a domestic cell company, or a foreign series or cell that conducts an insurance business is a juridical person for local law purposes, for Federal tax purposes it is treated as an entity formed under local law. Classification of a series or cell that is treated as a separate entity for Federal tax purposes generally is determined under the same rules that govern the classification of other types of separate entities.