Types of Captives
Captive insurers are formed to provide commercial insurance coverage to one or more entities. The
following types of captives are presented along a continuum of narrow to broad participation:
A pure captive insures the risks of its owners, affiliated entities,
and controlled unaffiliated entities (however, Montana pure captives may participate in
risk sharing pools with other captives). Since pure captives don't
provide direct coverage outside of their "business family," consumer protection regulations rarely apply. Thus, pure captives enjoy
maximum flexibility in the types of coverages they can write, the types of investments the captive can have, and regulatory reporting
requirements are much less than other types of captives .
A group captive is a general term for an industrial insured captive, association captive, or risk
retention group whereby the captive is providing coverage to a group of affiliated and unaffiliated entities. An industrial insured captive writes
insurance coverage only for a group of organizations that meet certain size and operational criteria. An association captive only insures
the risks of the association members. A risk retention group (RRG) provides only liability coverage to entities that are within a certain
industry pursuant to the Federal Liability Risk Retention Act of 1986.
In general, the above types of captives are capitalized by one or more entities affiliated with the captive's
insureds, giving the insured owners maximum control over the operation and activities of the captive insurance company. This changes when
we get to the next type of "captive."
An agency captive, rent-a-captive, sponsored captive, or a protected cell captive differ in that the
captive's capital is provided by an unrelated entity (typically an insurance company or insurance agent/broker). The captive sponsor then
"rents" capital and/or cells to various insureds (much like a hotel rents rooms to travelers) and provides various services to the
cell participants (for a fee). While these types of "captives" are easy to enter and don't require an up-front
capital investment by the insured participant, they offer the least amount of control over captive costs and operations and can be difficult to
exit. And because the sponsor has its capital at-risk, the sponsor usually requires that each cell be fully funded or collateralized up to
each cell's maximum exposure for as long as the exposure exists in the cell.
| 
