Captive insurance allows large corporations to preserve their liquidity by underwriting their insurance instead of paying premiums to a third party. 90% of Fortune 500 companies carry captive insurance because it gives them control over their risk management and allows them to insure risks that other companies will not insure. The captive insurance companies offer insurance only to the parent company and do not insure anyone else. They can also be placed offshore where legislation favors the insurance company’s growth and provides offshore financial services to the parent company.
Example of a Captive Insurance Company
In 2010, a huge disaster could have put British Petroleum Company out of business. The BP company was blamed for an oil spill in the Gulf of Mexico. BP is still around today because it was self-insured by a Guernsey-based captive insurance company called Jupiter Insurance. The insurance company paid out $700 million to fund the clean-up operations and save BP from bankruptcy.
Benefits of Holding Captive Insurance
A captive insurance company is an exclusively owned subsidiary commissioned to provide insurance policies for emergent risks that are hard to predict and even harder to insure in the usual way.
To provide financial stability and ensure the growth of a captive insurance company, one of the strategies that a company employs is to provide offshore financial services to raise the capital required to underwrite possible claims. This offers huge flexibility in managing risks and provides financial incentives for loss control.
Another benefit that the captive insurance policy provides is that it offers creative insurance solutions to the parent company. Insurance costs can be allocated to different business units, lowering the overall cost of insurance.
With greater control over claims and reduced costs of insurance, captive insurance companies can concentrate on raising the necessary capital by placing more investments in offshore financial services.
Having control over their insurance needs gives large corporations the means to make their insurance needs affordable. Captive insurance companies provide many benefits to the parent company. Each company can start its own captive or join a group captive insurance company. Group captive usually serves an industry like construction or manufacturing, and individual companies from the sector can join the group captive company.