Captive insurance companies can be set up in different ways including one that owned by an association, its members or both. It is called a “captive” because only a limited amount of entities is eligible to participate in the program. Association captives were meant to be a solution to the rising costs of insurance, which resulted in the banding together of companies to insure as one entity. Each captive insurance company selects a domicile, a state or offshore country that has enacted captive insurance laws and regulations giving that domicile primary regulatory jurisdiction over them.
Captives have gone through a swing in popularity
Association captive insurance companies have existed since the 60’s, and provide property and liability coverages to association members. However, market conditions discouraged the formation of new associations in recent years, with some existing programs disbanding due to a lack of demand for these types of services. The insurance market has subsequently changed more recently and associations are experiencing a renewed interest in the forming of captive insurance groups.
There are various benefits to an association and its membership in forming a captive insurance company. Those benefits include the following:
- Meeting member needs for affordable insurance coverage
- Availability of coverages not provided by the commercial insurance market
- A source of revenue for the association, and
- Opportunities to increase association membership
The first of these benefits is vital, as the rise in insurance costs can be a major burden on many business institutions. By meeting member needs, captives prove to be a valuable way of doing business, and are therefore imperative to a successful program. The other benefits, availability of certain coverages, a source of revenue, and increased association membership alone will not sustain a successful captive insurance program.
The 90’s were a period where captives did not perform well
During the 1990’s the commercial property and casualty insurance market was characterized by intense competition for businesses, mostly among the commercial insurance carriers. This was actually good for those in the market for certain insurance products, and it resulted in the availability of affordable insurance coverage and fairly broad coverage for the first time in a while. During this decade the insurance industry experienced what is referred to as a “soft” market. Thus, most associations captives were not in demand during that period simply because insurance was not an issue for most of those doing business.
Captives make a comeback
The formation of captives is on the rise with more states passing legislation to allow captives to be formed. In addition, emerging trends such as cyber risks and increased healthcare costs has seen increasingly more companies turning to captives, including midsize companies.