Large corporate organisations are opting for very high deductible structures by setting up captives and this has contributed to a large saving on their premiums. The captives cater for smaller losses and allowing the insurance market to concentrate on catastrophe risk. Also captives are usually formed to provide alternative risk management solutions to that of the conventional insurance market.

What is a Captive Insurance?

Captive arrangements come in different forms and the following below are some of the most common.

o Pure Captive

A pure captive insurance company is, in its purest form, a subsidiary company formed to insure or reinsure the risks of its parent and / or associated group companies. Once it is sold to other parties, it would be regarded as a general insurer and no longer as a captive.

o Off shore Captive

This is a captive which is established in a country which is different from that of the parent. In this instance the parent will be in South Africa and the captive will be established say in Dubai or Mauritius. The reason is that in some countries captives can be set up more speedily and at less cost, than in the parent country. Tax advantages are some of the reasons cited, although these are slowly disappearing.

o Ordinary Captive

Reasons for setting up a captive

There are a number of reasons why captives may provide a better means of risk management than the conventional market. However today a lot of organizations take into consideration the following:

o Availability of cover

Insurers may shy away from writing business where there is little spread, or a lack of technical information and understanding. This results in cover being unavailable or inadequate.

o Saving on Insurance Cost

In order for insurance companies to survive, the premiums they charge include amounts to cover the insurer's profit margin and overheads. Such overheads can be significant when considering insurers with large corporate structures to maintain.

o Insurance Market Changes

When the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. When the market hardens, the captive is able to retain a larger proportion of its risks, and can maintain cover for its parent even when commercial insurance is unavailable or prohibitively expensive.

o Claims management

The process of making a claim from a third party insurer can be long and involve a good deal of cost for the claimant. Where the insurer is a captive, the claims handling procedures can be dictated by management, cutting down on the delays and bureaucracy that are often a necessary part of the claims handling procedures of commercial insurers.

o Claims handling benefits

Captives generally retain a portion of the overall risk and reinsure the remainder. For this reason, when claims experience is better than anticipated, the excess of net premiums over claims is retained by the group. The reinsurance taken out by the captive is tailored to minimise the group's exposure where claims experience is worse than projected.

South Africa has already seen notable emergence of captive insurance activity in the mining sector. This has been necessitated by the lack of capacity or the willingness of insurance companies to insure such risks due to the lack of expertise.

In the second half of 2011 we have seen the price of insurance in London increase significantly. We have seen a significant increase is rates and premiums. This is due to the recent floods in Australia and the earthquake in Japan which have cost billions of dollars pushing up insurance premium charges indiscriminately across the global markets. Therefore in the near future we will see large corporate organisations take the same approach of setting up captive insurance as a way of reducing their insurance premiums.

---

Share this article