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Captives are particularly useful for businesses which have predictable losses or if cover for particular or
for emerging risks – for example cyber risks – is unavailable or too expensive in the wider insurance
market. A response to a hard market is often an acceleration of captive formations.

C2 Types of captive

Captive insurers fall into two main groups, pure captives and sponsored captives.

C2A Pure captives
Pure captives are 100% owned, directly or indirectly, by their insureds. For example, a single parent
captive writing only its parent’s risks, and a group captive established by, and for companies with
similar businesses or exposure and writes only their risks. Similarly, an association captive writes only
those risks of companies from a particular trade, industry or service group.
While we look at the main advantages and disadvantages of captives in general in sections C5 and C6
respectively, the issue may be whether to go it alone or to join a group or association captive. The
benefits of the latter approach may include:
• improved forecasting;
• greater risk retention potential;
• mass purchasing power;
• reduced overheads; and
• increase loss control emphasis.

On the other hand, single member captives will not have issues: with differing member needs; decision
making; rating controversies; reduced confidentiality; additional management time; or the change and
growth of participants.
Typically, the captive will take the form of a stock company in which each investor purchases shares, or
a mutual to which capital is contributed. The risks are combined and profit generated based on the
proportion of ownership. A board or governing body will manage the company according to its articles or Reference copy for CII Face to Face Training
bye-laws. You may have heard of risk retention groups (RRG) in the USA as a common example of group
captive. A RRG is formed and operated pursuant to the Federal Risk Retention Act of 1981 and owned
solely by its policyholders. It is, however, limited to writing liability insurance business in the state(s)
registered.

C2B Sponsored Captives
Sponsored (or rental) captives are captives which are owned and controlled by parties (or sponsors)
unrelated to the insureds. They do not necessarily pool the insureds’ risks or require insureds to
contribute capital but they do charge a fee for providing the core capital and for organising and
operating the captive.
A protected cell captive is an example of a rental captive which does not pool its insureds’ risk. Instead,
it maintains a separate underwriting account for each insured participant. These accounts (or cells) are
legally separated and protected from each other and from every other participant’s cell. So, the assets in
one participant’s account may not be used to pay the liabilities in another’s account without an express
agreement to do so. A segregated portfolio company is another example of a protected cell captive.
Competitive captive management services exist in major captive locations. As we have seen, Bermuda
9 has used the infrastructure available to service the many captives within its territory to support a
Chapter property/catastrophe insurance sector and alternative casualty market.

C3 Risk financing

If captives are a risk management tool involved in the identification, quantification and mitigation of
Captives are a risk
management tool risks to which the parent’s businesses are exposed, the choice essentially becomes one of how to
finance them – in other words, whether to retain or to transfer those risks. In theory, a company will be
exposed to a range of risks as illustrated in figure 9.1.