Captive Insurers – Part 2
The implementation of the
Federal Risk Retention Act encouraged formation of captive insurance companies
known as Risk Retention Groups (RRGs). These were formed under the federal law
to write liability insurance for members of the group. Captives were usually
formed at locations outside of the United States or “off-shore." Foreign
and “off-shore” captives had the advantage of not being subject to the premium
taxation and insurance regulations of any state. Bermuda was a major domicile
location for offshore captives but other popular locations included the
Bahamas, Barbados and the Cayman Islands. These groups contributed to the
viability of the alternative risk market because they represented another
method of insuring risk beyond the traditional insurance mechanism.
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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