What are captive insurance companies? For many companies, they are simply a better way to manage the cost of risk. The majority of Fortune 500 companies use captives, and increasingly, smaller and midsize companies are discovering the advantages of captive insurance companies.
Oak Harbor Re allows for midsize employers to have all the benefits of self-funding, while reducing risk, through a protective layer of captive reinsurance. A group captive program can be a versatile solution for employers wanting more transparency and control over their employee health plans.
Frequently Asked Questions:
What is a captive?
A captive is an insurance company created to insure the risks of its owner(s) or participants. Captive insurers provide an alternative risk financing option for self-insured enterprises, allowing an entity (or group of entities) to create a licensed insurance company to provide coverage for itself. The owner(s)/participants can reduce costs, improve cash flow, and gain coverage, stability, and control. A captive insurer operates like any other commercial insurance company and is subject to regulatory standards, including reporting, capital, and reserve requirements.
Are captives new?
The captive concept was born in the 1950s, when large factories and steel mills in the U.S. faced rising insurance premiums. Rather than pay sky-high rates, a steel mill in Ohio sought a creative solution.
The mill’s insurance broker launched a new insurance company, called the Steel Insurance Company of America, that was owned and operated by the steel manufacturer. It issued an insurance policy to its parent company. The steel mill already owned a “captive” mine that provided iron ore only for its factory, so the name was applied to the new “captive” insurance company. (Source: International Risk Management Institute, www.captive.com, 2020)
Today, after more than 70 years, captive insurance is a multi-billion dollar business. There are nearly 7,000 captive insurers worldwide.
Who uses captive insurers?
Today, the vast majority of Fortune 500 companies own captives for their liability, workers comp, and other risks. Major universities and hospitals use captives to insure malpractice claims. Forming a captive insurer can require a great deal of capital and time, so historically it has been the realm of large corporations.
What does a captive insurer do?
A captive generally functions like a regular commercial insurer by:
Issuing or reinsuring policies (typically only to its owner(s) or participants)- Collecting premiums
- Paying claims
- Reporting its financials, such as balance sheets and income statements
- Complying with legal and regulatory requirements in its jurisdiction
Issuing or reinsuring policies (typically only to its owner(s) or participants)Can small to midsize companies use captives?
Yes. Today there are flexible options, like rent-a-captives and group captives, that allow companies to avoid the time and expense of creating their own captive and instead, join an existing captive. Insurers like Oak Harbor Re offer protected cell programs, which are similar to segregated account captives in other domiciles, as a turnkey solution. The protected cell program “rents” its services and established legal structure to clients who wish to join a captive program, but don’t want to invest in and own their own insurance company.
What is a group captive?
Single-parent captives have only one owner. Group captives, on the other hand, have multiple owners/participants.
A protected cell captive is similar in many regards to a group captive, but differs in certain ways. Companies joining an Oak Harbor Re protected cell program are not owners or investors in Oak Harbor Re or the protected cells in which they participate.
A legal document called the Protected Cell Program Agreement (PA) between Oak Harbor Re and each participating company defines all the rights and responsibilities.
Oak Harbor Re’s management maintains a high degree of control over the assets and liabilities linked to a protected cell. Joining an Oak Harbor Re program is not meant to mirror the rights and control that a company would have in its own wholly owned captive. Rather, it is meant to be a simplified way to participate in a group captive program. The decreased level of control is the trade-off for the greatly simplified entry and exit process.
Do the protected cells share assets and liabilities?
No, they do not. The assets of each protected cell are kept in its own walled-off cell. Each protected cell operates separately and its assets and liabilities do not commingle with other cells. Assets in one account may not be used to pay liabilities in another.
How does the relationship between the captive and its members work?
The relationship between Oak Harbor Re and participating companies is governed by a document, called the Protected Cell Program Agreement (PA). The PA defines the rights and obligations of each member for the particular captive program in which it is participating. It also describes all the services provided by Oak Harbor Re and the handling of important details, such as funding, distributions, fees, and investments.