Group or association captives are formed to insure the members of an association. Association captives are generally considered most effective when members of a group have similar exposures and therefore share similar coverage wants and needs when it comes to insurance. Basically, it is creating an insurance company established by a trade group or other association to provide selected types of primary insurance and/or liability insurance for members of the association and giving access to reinsurance markets.
The two most common motivations for establishing a captive are to reduce the cost of insurance by eliminating insurer profits from the cost structure, and, ensuring the availability of tailored coverage when comparable coverage is unavailable from commercial markets or may simply be unreasonably priced.
Factors to consider in selecting the domicile for a captive insurer
Two main considerations are how the domicile charges expenses for regulatory examinations and timeliness of regulatory exam reports, as well as the adequacy and competency of staff in the domicile regulatory agency. Additional factors should include, but not be limited, to the following:
- The lines of insurance the domicile permits a captive to write
- The accessibility to regulators and governmental officials that act on the legislation and regulations that impact captives
- The legislative and regulatory philosophy, commitment, and appreciation of captive insurance companies
- The supporting infrastructure in the domicile (i.e. captive managers, third party administrators, legal counsel, investment managers and consultants, etcetera, if the captive is to be staffed in-house, and access to air transportation)
- The regulatory reporting requirements
- The requirements of records and files that must be maintained in domicile and therefore duplicated if captive administrative offices are located elsewhere
- The flexibility for a captive to set its rates without prior approval of domicile regulator
- The investment restrictions, the premium taxes, and
- The requirements for meetings of the board of directors of the captive
Association captives are essentially a form of self-insurance. Many groups or associations feel compelled to set up captives for myriad reasons. And although most of the 5,000 captives in existence today were established by for-profits, there are many captives serving the insurance needs of nonprofits and associations as well.