What is an insurance captive?

The traditional model of insurance involves buying a policy, usually through a broker that is backed by an insurance carrier.  In this article, we’ll cover an alternative called an "insurance captive" and how captives are most commonly used in the construction industry.

An insurance captive is an insurance company that is owned by the policy holders it insures. In more simple terms, it’s YOUR insurance company.

The concept of captive insurance dates back to the 1950s, when some large companies began to set up their own insurance companies to provide coverage for their own risks.

The first captive insurance company was created by the International Business Machines Corporation (IBM) in the 1950s to provide coverage for its employee health benefits.

The use of captive insurance companies grew significantly in the 1980s and 1990s, as more and more companies became interested in the benefits of having greater control over their insurance coverage.

In the early 2000s, the use of captive insurance companies began to expand beyond the United States, with many companies in Europe and other parts of the world setting up their own captives.

Today, captive insurance companies are a common feature of the insurance industry, and are used by companies of all sizes to provide coverage for a wide range of risks.

Are captives & self-insurance the same thing?

No.  They’re actually quite different.  With self-insurance, you may put money aside to use in the event of some loss.  For example, a damaged piece of equipment.  However this money might not be enough to cover the full loss and the funds aren’t tax deductible.  With captive insurance, your company will pay premiums to the captive as if you were paying them to any other insurance carrier.  Those premiums would be tax deductible and your policy would insure you against losses up to an agreed limit.  Your captive would pay claims against that policy and could even purchase reinsurance itself to help cover losses that exceed the captives resources.

Are there different types of captives?

Yes. There are two main types of captives. Single parent captives are insurance captives that provide insurance to a single owner. Group captives as you may have guessed, provide coverage to multiple owners.

How are captives used in the construction industry?

Successful construction companies understand the risks they typically experience and structure their operations to minimize exposure to them. Unfortunately, with the way commercial insurance works, they often pay higher commercial insurance premiums to compensate for insured construction-related companies that do not pay as much attention to risk management.

Commercial insurers operating in the construction space must price their coverage to make a profit on their overall portfolio of construction risk, often resulting in higher insurance premiums or complete lack of availability for coverage.

Captives offer risk-aware construction companies more tailored rates & coverage, they have more control over the claims process, and can even create a new profit center.

You can learn more about this in our article “Why Every Awesome Construction Company Should Consider Captive Insurance”

In conclusion, a captive is simply an insurance company that is owned by the people or companies it insures.  Many top companies in the construction industry are already using captives as an alternative to traditional commercial insurance because of their advantages such as more predictable and accurate rates, more control over claims, and the ability to earn profits.