Types of Captives
While there are many variations to the structure of a captive insurance company, captives can be separated into the following basic categories. Note, this section is only a summary and does not analyze the merits of each type of captive.
- Single-Owner Captives. These captives are set up and operated by a single owner to insure its own risks and the risks of its subsidiaries and affiliates. Many single-owner captives provide coverage for other, non-related organiza¬tions. Single-owner captives that insure only the risks of the owner or the owner’s subsidiary operations are termed “pure” captives.
- Small and Intermediate Captives. These single-owner captives generally have annual gross receipts of less than $600,000 in order to qualify as a small captive insurer under IRC §501(c)(15), or annual net written premiums of less than $1,200,000 in order to qualify as an intermediate captive insurer under IRC §831(b). Because of the limited revenue, these types of captives require a domicile favorable to small and/or intermediate captives and a turnkey type of administration to control the transaction costs associated with such a captive.
- Group Captives. These captives are owned by multiple, non-related organizations (policyholders) and are initially set up to insure the risks of the owners. These risks are usually, but need not be, similar in nature. Many provide coverage for organizations other than those affiliated with the owners.
- Association Captives. These are similar in purpose and organization to group captives. They are formed to insure the risks of companies involved in the same or similar industries. Access is usually restricted to association members.
- Agency Captives. These are captives owned by insurance agencies and formed to insure the risks of the agency’s clients.
- Rent-a-Captives. These are captive insurance companies owned by an organization that is not one of the policyholders, such as a broker, a reinsurer, or a fronting insurance company. The fees to enter one of these facilities are less than the initial capital requirements of a single-owner or group captive. However, they do not offer as much flexibility regarding coverage and/or limits, and have varying degrees of safety depending on the sponsor and the types of risks and insureds the captive insures. A principal disadvantage is that a rent-a-captive is at risk for policies which were written by every person associated with that particular captive since its formation and its usual light capitalization.
- Protected Cell Companies (PCC). These are called segregated portfolio companies or segregated account companies in some domiciles. PCC status allows a captive to segregate accounts so that each account is legally protected from the liabilities of other accounts within the captive. Moreover, PCCs guarantee each “cell” within the company will be shielded not only from sharing capital and surplus with other cell owners, but also from any legal action against the cell’s assets. This protection is known as “walls of brick,” since even in the case of cell liquidation, it has no legal recourse against any other cell in the company.
- Risk Retention Groups (RRG). These are member-owned business associations that are formed specifically for the purpose of pooling and sharing similar business risks. RRGs must be licensed in at least one state or the District of Columbia, but once licensed are allowed under the federal Liability Risk Retention Act of 1986 (which specifically preempts contrary state laws) to underwrite the insurance risks of its members nationwide, including giving preferential rates, terms and conditions to groups seeking liability insurance coverage. The members of an RRG must be engaged in the same or similar businesses, at least so far as the liability exposures are concerned. Interestingly, insurance companies are forbidden from being members of an RRG unless all the other members are insurance companies. RRGs are exempt from federal and state securities registration, but must make full disclosures of all their operations to their members.
