Captive Insurance 101: What Are Captive Insurance Companies?
A captive insurance company refers to a structured and effective means of self-insurance that insures the owners’ and shareholders’ retained business risks. A captive insurance company is a legally recognized and approved insurance firm that operates under the supervision of the insurance department of its native state.
Captive insurance companies are owner controlled. The owners, with the help of a captive manager and other relevant professionals, are responsible for the management of the insurance company.
Traditional Insurance Companies vs. Captive Insurance Companies
Both traditional and captive insurance companies provide insurance coverage to the owner. However, there are clear differences to be aware of.
Traditional Insurance Companies
Traditional insurers are authorized by state insurance departments to sell preapproved insurance plans to the public. They are supervised and controlled by the state insurance departments where they are authorized to offer insurance to the public. Shareholders or policyholders own and control traditional insurance companies.
Insurers risk their own capital, seek reinsurance to protect it from significant losses, and keep the underwriting gain. In return for the insurer’s guarantee to repay the insured in the case of a covered loss, the insured assumes a known, but generally minor, loss in the form of payments to the insurer.
Captive Insurance Companies
Captive insurance companies are legal insurance entities and are an accepted form of self-insurance (IRC §831). They are owned and controlled by their owners. However, they are supervised and regulated by their state insurance department.
Captive insurance may be used by companies or individuals that wish to steer away from commercial insurers and risk their own capital by creating an insurance company of their own, thereby personalizing their risk management program. Insurance is tailored to the risk management requirements of owners, may help owners reach financial goals while covering against catastrophic risk, and enables owners to share in the underwriting profits made by the insurer.
What Is a Simple Explanation of How Captive Insurance Works?
The owner, referred to as “the entity,” collaborates with AgriCap to establish a captive insurance company. The entity owns and manages the captive insurance company. Working together, the owner and AgriCap create a policy to address the risks that the owner wants coverage for. The captive insurance company writes, rates, and reinsures the insurance policy.
Premiums are paid to the captive insurance company to take on the risks stipulated in the policy. Losses are covered by the captive insurance company as per the policy’s conditions.
If the owner does not incur a loss, the excess premiums are kept by the captive insurance firm. This is referred to as an underwriting gain. Earned underwriting gains are included as part of the insurance company’s annual capital, which ensures that there is no loss. Investing insurance premiums until the funds are needed to settle claims allows captive insurance companies to earn an income.
What Are Sponsored Captive Insurance Companies?
AgriCap owns and works with AgriCap Assurance, a Sponsored Captive Insurance Company.
A sponsored captive insurance company, or SCIC, operating protected cells is considered a single legal entity whose operations consist of two parts, namely:
a noncellular component made up of a “core,” and
an infinite number of segregated components or “cells”/“protected cell.”
Under relevant state laws regulating SCICs, this structure establishes a legal segregation of the SCIC’s assets and liabilities into a number of separate cells and a central core. Each cell is entirely self-contained and distinct from the other cells as well as the core.
Benefits of a Sponsored Captive Insurance Company and Protected Cell
A sponsored captive insurance company provides the protected cell with the following:
● Personalized insurance coverage for both typical and specialty risks
● Identification and filling of gaps in traditional insurance policy coverage
● Underwriting and investment profits captured for the owner
● Tax treatments that the owner can access that are reserved for insurance companies, as well as providing efficient and effective financial management tools.
AgriCap Core Captive Insurance Policy Suite
AgriCap provides a unique policy suite designed for the agriculture industry, offering the following benefits to the protected cell:
● Custom policy forms to cover gaps in traditional insurance policies and markets
● Agricultural business income protection against severe weather occurrences that limit productivity and, hence, income and/or costs for a farm enterprise or agribusiness trade region
● Coverage against income loss resulting from unfavorable weather events
● Insurance policies for other property & casualty risks and ESG coverage requirements to meet the needs of the entity/owner
AgriCap Assurance Company Core Policy Suite
The latest AgriCap Core policy suite consists of the following:
● ACA All-Risk Crop Insurance Policy (protection against commodity production yield loss)
● ACA Contingent Business Income Insurance Program (protection against revenue loss as a result of adverse weather)
● ACA Custom Property and Casualty Insurance Programs
● ACA Custom ESG Insurance Programs
Overview of Protected Cell Development Steps
Here is a brief overview of the steps of protected cell development. The steps are as follows:
AgriCap collaborates with an entity to create an insurance policy that covers the entity’s unique risks based on information supplied by the entity or information received from external sources.
AgriCap will draft a protected cell proposal. The entity will then review AgriCap’s proposal and pro forma. The entity will then decide whether or not they want to continue with the process.
If the entity decides to proceed, they need to sign a $1,250 Letter of Intent / Agreement Letter.
AgriCap will officially engage the reinsurance market to examine the insurance cover and determine the entity’s premium amount. After further review, the entity may again choose to move forward or to terminate the process.
A captive insurance application will be completed by AgriCap and the entity. Captive Planning will be responsible for creating the insurance entity and submitting it for approval to the state of domicile (Utah).
The captive is received, reviewed, and approved by the state of domicile (Utah). AgriCap will then authorize a firm order for reinsurance to be issued to the reinsurance market.
All fees will be paid by the newly established protected cell. The entity owner will then receive insurance and reinsurance.