Captive Insurer

Instead of buying all their insurance from commercial insurers, some large companies create their own insurance subsidiary. The parent company pays premiums to the captive, which pays claims for the group's losses.

Captives offer several potential benefits. They can lower insurance costs by removing insurers' profit margins and expenses, provide cover for risks that are hard or expensive to insure commercially, give the group more control over claims and risk management, and allow access to the reinsurance market directly. Investment income on reserves stays within the group.

For example, a large retail chain might set up a captive to insure its property and liability risks, buying reinsurance only for very large losses.

Captives are often located in jurisdictions with specialized regulatory regimes, such as Bermuda, the Cayman Islands, Vermont in the United States, Guernsey and Luxembourg. They must meet capital and regulatory requirements. Tax authorities scrutinise captives, since some arrangements have been used mainly for tax benefits rather than genuine risk transfer.