Insurance Intersection – February

Industry Articles

There is a new insurance concept in Ohio called a “Captive”.  Up until now, we used the word “captive” in reference to an agent that was exclusive to one insurance carrier.  Hence the agent was referred to as an exclusive or captive agent because they could only write business for one company.  The new concept really is a form of self insurance for the commercial entity.

Captive Insurance is an alternative to traditional insurance that enables businesses to control and customize their insurance program in a manner that is responsive to their  financial objectives.

What is a Captive?

A captive is an insurance company created by its parent company to insure its risk(s) and better manage its costs. Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the risk-management needs of the owners or members. The type of entity forming a captive varies from major multinational corporations to small nonprofit organizations. Once established, the captive operates like any commercial insurance company and is subject to state regulatory requirements, including reporting, examination, capital and reserve requirements.

In 2014, Governor Kasich signed into law House Bill 117, legislation allowing Ohio businesses the ability to form captive insurance companies in the state, making Ohio the 30th state to become a captive domicile in the United States. This new law provides significant new opportunities for Ohio businesses to better manage their own risk by insuring themselves instead of seeking insurance in the commercial market.

Captives can be formed for the following Authorized Lines of Insurance

  • Commercial Auto Liability
  • Commercial Auto Physical Damage
  • Commercial Multiple Peril
  • Fidelity
  • Inland Marine
  • Life
  • Medical Malpractice
  • Ocean Marine
  • Other Lines (at the Superintendent’s discretion)
  • Workers Compensation (excess only)

There are Three Types of Captives

  1. Pure Captives
  2. Protected Cell Captives
  3. Special Purpose Financial Captives

A Pure Captive will insure the risks of its parent company and any of the parent’s affiliated companies ONLY.

A Protected Cell Captive will consist of a core and an indefinite number of cell entities or participating businesses which are legally separate from one another.  Each separate entity participating in the protected cell captive has dedicated assets and liabilities so that the assets of an individual entity cannot be used to meet the liabilities of any other entity.  Think of it as a partnership of related businesses coming together to create an insurance program to protect all of the related businesses. But, each business stands on its own and is not responsible for the liabilities of the other.  It’s similar to a group insurance or pooling concept without taking on the actual liabilities of the other entities.

A Special Purpose Financial Captive will be used to reinsure the risks of a parent or affiliate, usually a life insurance company to facilitate securing the risks by accessing alternate sources of capital to meet the reserve requirements of specific life products.

Effects on the Insurance Market

This “captive” concept could prove to be very valuable to commercial entities which have had difficulty obtaining coverage in the P&C market or have had to go to Surplus Lines carriers or participate in a structured insurance pools.  These businesses feel that they have a very good control over the risks involved with their operation but have had difficulties in the insurance market based on “what” they do and not so much “how” they do it.  Now they can look to self-insure under the Pure or Protected Cell captive concept and control the insurance risks and costs more effectively.

It will also be interesting to see how this concept may be applied on the health insurance side as the Affordable Care Act moves toward the Small Business and large group mandates for coverage.  Could an individual business or a group of businesses use this “captive” concept to provide the required benefits under the Affordable Care Act and be in compliance with the mandated coverage for their employees under the law?