What kinds of risk can be underwritten by a captive?
One of the most attractive advantages of a captive insurance company over traditional insurance is that the captive can underwrite almost any type of risk the captive owner desires. The important qualification is that it must be commercially reasonable—but it doesn’t have to be commercially available. In fact, this very advantage drives many to establish a captive. A business may have a specific risk that is either unique to the market or not common enough for the market to have enough experience with the risk to be comfortable underwriting it. In this common occurrence, self-insurance is the only option a business has unless that business operates a captive.
Another advantage to having the captive write insurance is the availability of flexible terms. If you would rather pay premiums once per year, no problem; if you want to pay premiums once a month, no problem; if you want to structure a three-year policy term, no problem—flexibility rules the day.
When considering what policies would be appropriate for a captive to write, looking to the risks that the company currently self-insures is a good place to start. With a captive, the business can identify those risks it currently self-insures and write policies to cover those risks without concern for traditional market limitations. In other words, the captive looks at the specific experience and risk profile of one company—not the entire market—to determine the appropriate coverage and premium levels. This is in contrast to the traditional market approach that looks at the broad market as opposed to the individual company to determine its coverages and term-flexibility.