Captive
Insurers – Part 2
The Federal
Risk Retention Act encouraged formation of Risk Retention Groups (RRGs). These
were formed under the federal law to write liability insurance for members of
the group. Such groups were usually formed outside of the
Note: Due to changes in law, a number of U.S. States
also allow the formation of captive insurers.
Pure
captive: refers to a captive that
is owned by a single, parent company. This form was the initial technique for
solving insurance cost and availability problems because of the failure of
traditional insurance markets to respond to those needs. Shortly after they
came into existence, retention groups developed. The concept continued to
mature and spawned more variations. They included:
Rent-a-captives: These are captives formed by insurance agents or brokers.
With this concept, interested businesses rent the operating shell of the
captive insurer to handle the coverage needs of the business. It allows the
business to solve coverage problems and avoid high start-up and operating
costs. The disadvantage is that the rented captive controls premiums and
investment income but it still fulfills the main purpose of resolving the
issues of cost and availability.
Segregated
Cell: This is a sophisticated modification of a
rent-a-captive. There is a significant difference. In the rent-a-captive
approach, all premiums of the participants contribute to the group as a whole
and the poor results from one participant affect all the others. In a
segregated cell captive, the premiums, losses, reserves and investment income
of each participant is separated from those of every other participant.
These
modifications and others contributed to the growth of the alternative market.
It allowed businesses skilled in handling risk to take advantage of new
strategies where insurance is a component of risk management, rather than being
the entire strategy.
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