A captive insurance company is:-

“a limited purpose, wholly owned insurance subsidiary of an organisation not in the insurance business, which has as its primary function the insuring of some of the exposures and risks of its parent or parents affiliates”.

There are generally speaking two main reasons why captives are formed:

  • dissatisfaction with conventional insurance markets;  and
  • the “benefits” of a captive.

The former will tend to embrace:

  • volatility of insurance prices and capacity;
  •  inequitable rating structures;
  • unavailability of cover;
  • unacceptable rating;
  • inadequate service.

The “benefits” are generally accepted to be:

Insurance Savings

Use of a captive ensures that the organisation is able to avoid contributing to traditional insurer’s costs and expenses.  By this we mean non-risk-associated expenses such as administration, marketing and a contribution to profit.

Selection of risk

Selected risks can be retained by the captive or transferred to a traditional insurer.  Those risks with a relatively predictable experience would be obvious candidates for retention.  Additionally, those risks considered inappropriate for traditional insurers by virtue of their exposure or pricing factors may nevertheless be suitable for a captive programme.

Risk Control

Retaining risk means that the impact of the loss experience is felt immediately.  Improvement or deterioration in the parent’s loss experience will be reflected in the underwriting results of the captive.

Price Stabilisation

The insurance market is by nature cyclical and this may well adversely affect an organisation and their ability to forecast short or long term premium cost.  This point is emphasised by the recent transition from soft to hard market post September 11 2001.

Access of reinsurance markets

The reinsurance market is a ‘wholesale’ insurance market.  A reinsurers costs are minimised since they do not have to maintain the same branch network or have the same staffing and administration overheads that the primary insurers, who operate within the ‘retail’ market place, have.  Consequently Underwriters are able to relate premiums more directly to loss experience.  In addition, reinsurers tend to be far more flexible on programme make-up and the insurance of unconventional risk.

Development as a profit centre

The successful operation of a captive adds value to the parent organisation as its pure risk costs are reduced through improved loss control and reduced risk financing costs.


Premiums payable to a captive insurer are a tax deductible expense in the same way as those that are paid to a conventional insurer.  However it should be noted that Insurance Premium Tax is also payable in the same way as it is in the home domicile.

Offshore location

The major benefits arise through the flexibility of the regulatory regime and long-standing experience. In addition, capitalisation and ongoing running costs are invariably considerably lower than home domicile establishment.

For those organisations that a captive insurance subsidiary may not be suitable or appropriate but who would still wish to avail themselves of the benefits of a captive insurance programme it is possible to rent an existing insurer.

Protected Cell Company (PCC)


  • Is one legal entity;
  • Provides, for each cell, legal segregation and protection of assets and liabilities;
  • May create its own core shares and cell shares, providing two classes of assets-core (or non-cellular), attributable to the PCC directly, and cellular, attributable to the cells;
  • Can provide an unlimited number of Cells;
  • Can be converted from an existing company;
  • Offers flexibility in the allocation of capital between the core and individual cells;
  • Offers a wide range of potential applications.

The benefits of a PCC can include:

  • Reduced operating and start-up costs;
  • Suitable for ‘one off’ or bespoke transactions;
  •  No requirements to form a company;
  •  Useful first stage prior to establishing wholly owned subsidiary;

Who should consider a captive?

Any organisation that wishes to achieve the following strategic goals:-

  •  Effective management of corporate risk;
  • Cost controls;
  • Long-term price stability;
  • Improved administrative efficiency

Achievement of these goals should provide a sound base for the development of  future risk financing strategy involving mutually beneficial partnerships with insurers rather than short-term responses to market conditions or other external factors.