Captive insurance

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Captive insurance is an alternative to self-insurance in which insured parties establish a licensed insurance company for their own use and benefit.^[1] The company focuses its service on the specific risks of the insureds and is incentivized to price the insurance near cost, since it has no separate investors. A captive insurance company helps its sponsors establish regular cash flow for their risks and offers them a direct choice of reinsurance. It also provides a tax benefit, since insurance premiums are a deductible business expense while directly held reserves are not.

When a company creates a captive they are indirectly able to evaluate the risks of subsidiaries, write policies, set premiums and ultimately either return unused funds in the form of profits, or invest them for future claim payouts.^[2] Captive insurance companies sometimes insure the risks of the group's customers. This is an alternative form of risk management that is becoming a more practical and popular means^{[according to whom?]} through which companies can protect themselves financially while having more control over how they are insured.^{[citation needed]}

There are many variations of how captives can be set up, which can be broken into two categories. The first category is known as non-sponsored in which the company is the creator and beneficiary. Within that category the most common are single-parent or “pure”, group and association. The second category is sponsored in which the captive is owned and controlled by another company that allows other companies to “rent” insurance. This category includes Protected Cell Captive Insurers and Rental Captives.^[3]