What is a captive and why do you need one?
What is a captive?
A captive is an insurance company set up by its owners primarily to insure against its own specific risks. Captives are an effective way to take financial control of insurance allocations and manage risks.
Once established, the captive works in the same way as a commercial insurance company and is subject to statutory regulatory requirements including reporting, capital and reserve requirements.
Why are organisations forming captives?
Even though the insurance market continues to be challenged with soft premium rates and low interest rates, an appetite for captive utilisation still exists, and in many ways is increasing year on year.
Aon’s research indicates that companies use captives predominantly as a strategic risk management tool that facilitates greater control over their risk program, particularly around policy terms and conditions.
Organisations that have taken such a considered, strategic approach have reaped considerable rewards in reduced costs and improved coverage. Many international businesses have found that an insurance subsidiary is the best means of creating and administering a global risk management programme
Is a captive right for my organisation?
Take a look at the following characteristics – how many of them apply to your business?
- Loss expectation is lower than traditional insurance market.
- Premium size of at least $1m.
- Good historical loss experience.
- Good loss control programs in place.
- Good loss experience.
- Your risk is often misunderstood or poorly coded by carriers.
- You are seeking a profit centre using insurance to generate an income stream.
If the majority of your answers were a yes, a captive could be beneficial to your organization and help to finance risk in a more cost effective and efficient way. You should seriously consider a captive feasibility study as a first step.
What are the benefits of a captive?
Each owner has a different set of rationale for establishing and maintaining a captive. The most commonly shared attributes are to
- Take a long-term view in risk financing strategy
- Gain a better and more sustainable position in dealing with large fluctuations in pricing and capacity in the insurance market
- Use captives as a vehicle to centrally manage and fund risk management initiatives
Did you know? Aon won the ‘Captive Manager of the Year’ award at the 2017 UK Captive Services Awards. Aon Global Risk Consulting and Aon Captive & Insurance Management took home three awards on the night.
Aon’s Risk Consulting team can assist you at any stage of the risk journey, from risk identification and profiling through to risk management and claims consulting. You can find out more about our offering here.
Read more on Aon's Captive and Insurance Management services