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Captives and Other Risk-Financing Options
ance policy with a U.S.-licensed insurance company, which it may need to do
for legal and business reasons.
The rent-a-captive concept was introduced in Bermuda 20 years ago and
remains a popular alternative market mechanism. Rent-a-captives serve businesses
that are unable to capitalize a captive but are willing to assume a portion
of their own risk and share in the underwriting profits and investment income.
Generally sponsored by insurers or reinsurers, which essentially “rent out” their
capital for a fee, the mechanism allows users to obtain some of the advantages
of a captive without having the expense of setting up a single parent captive
and meeting minimum capital and surplus requirements.
Captives have been expanding into the employee benefits arena since
2003, the year in which the Department of Labor gave final approval to Archer
Daniels Midland Co.’s plan to use its Vermont captive to reinsure group life
insurance benefits.
While the leading domicile for captives in the U.S. is Vermont, offshore
captives covering U.S. risks are predominantly located in Bermuda, where
they enjoy tax advantages and relative freedom from regulation. The Cayman
Islands, Guernsey, the British Virgin Islands, Luxembourg and Barbados are also
significant centers for captives. Vermont is the leading domicile for captives in
the United States.
II. Self Insurance
Self insurance can be undertaken by single companies wishing to retain risk or
by entities in similar industries or geographic locations that pool resources to
insure each other’s risks.
The use of higher retentions/deductibles is increasing in most lines of insurance.
In workers compensation many companies are opting to retain a larger
portion of their exposure through policies with large deductible amounts of
$100,000 or higher. Large deductible programs, which were first introduced in
1989, now account for a sizable portion of the market.
III. Risk Retention Groups
A risk retention group (RRG) is a corporation owned and operated by its members.
It must be chartered and licensed as a liability insurance company under
the laws of at least one state. The group can then write insurance in all other
states. It need not obtain a license in a state other than its chartering states.
30 I.I.I. Insurance Handbook www.iii.org/insurancehandbook