It may sound like a hostage situation, but a captive insurance company is not being forced to write policies against its will.

A captive insurer simply provides coverage exclusively to its parent company or other members of the same corporate group.

“The potential benefits of having a captive insurance company include lower insurance costs, tax advantages, underwriting profits and greater control over coverage,” explained Investopedia. “Captive insurance companies can be helpful when the commercial insurance market is unable or unwilling to provide coverage for certain risks.”

On the other hand, it means a non-financial sector firm will have to take on complex regulatory requirements and weigh the risk of being underinsured. To strike a savvy balance, companies often tap both the commercial insurance market and their own captive insurer at the same time.

Reinsurance market

Captive insurers are common in reinsurance (“insurance for insurers,” as Investopedia put it).

The Luxembourg Insurance and Reinsurance Association (Aca) stated: “Luxembourg is the largest captive reinsurance market in the European Union. The vast majority of the 200 reinsurance companies in Luxembourg are ‘captives’, i.e., they are separate legal undertakings within a group structure whose only objective is to reinsure the risks of the group. The use of a captive is often referred to as ‘internal reinsurance’.”

Upcoming conference

The European Captive Insurance and Reinsurance Owners Association, a pan-EU trade group based in Kirchberg, holds its annual European Captive Forum on 8-9 November 2023. More information about the conference can be found here.