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Captive insurance explained infographic

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What is Captive insurance?

A Captive Insurance vehicle is an insurance company established with the specific objective of insuring risks emanating from their parent group.

A large organisation, such as FTSE 350 or FORTUNE 500, has multiple and complex risks.

The parent forms a captive insurance company to insure their risks.

Risks can be insured for the following:

  • Machinery
  • People
  • Buildings
  • Products
  • Vehicles

Instead of paying a premium to a wholesale insurance company, the premium is paid to the captive, depending on the level of claims received, the captive could retain any excess of the premium received over claims paid, but conversely claims could exceed the premium paid.
A company with straightforward risks buys insurance from the wholesale market.

Companies with varied or complex risks may have a captive.

Securities-Backed Line of Credit (SBLOC) Structure

Step 1: Parent company has diverse insurance needs and forms a captive insurance company to cover their risks.

Step 2: The captive insurance company covers parents risks and the parent pays premiums into the captive. Some risks may require reinsurance from the wider insurance market.

Step 3: The captive secures a Letter of Credit from the bank in return for providing collateral (cash or securities) as leverage.

Step 4: The fronting insurer issues the insurance policy on behalf of the Captive and is liable for any claims, the SBLOC is their security.

Security Trust Agreement (STA)

Assets are held by the trustee for the benefit of the Fronting Insurer in cash, fixed income or equities.

Captive Insurance Company (Grantor) >> Captive settles assets into the Trust >> Trust >> Fronting Insurance Company (Beneficiary)

Where can Captives be set up?

Captives are set up in jurisdictions or states with specific legislation to support captive insurance.

Onshore US: 30%
European market: 18%
Bermuda & Caribbean: 48%
Rest of the world: 4%

Some examples of why companies form Captives

Insuring the uninsurable
The captive can write/retain certain risks that may not be available commercially, or at an acceptable price.

Direct access to reinsurance market
Saves costs of involving third parties in arranging cover.

Tailor made policies
Flexibility to tailor insurance cover to meet bespoke requirements.

Increase Reserves
Over time if (claims are less than premiums paid) the captive builds up reserves reducing reliance on the reinsurance market.

Avoids the capacity/appetite and pricing fluctuations that are seen in the insurance market.

Cash Flow
Premium payments are timed to fit the cash flow of the parent organisation.

What services do we provide Captives?

Day to day banking services

To help a captive achieve greater returns on their assets within acceptable risk parameters

Stand By Letter of Credit (SBLOC)
SBLOC to support a Captive’s fronting insurance arrangements

A no credit alternative to LoC’s, which in certain situations is a more flexible solution

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Our experts are here to support the specific needs of captive insurers.