Treasury To Study Possible Abuses Of Small Captive Insurance Companies

A captive insurance company is a risk-financing vehicle that is widely used by large enterprises worldwide to bring their insurance costs under control. Essentially, an enterprise forms and manages its own insurance company as a subsidiary, and the enterprise’s other operating subsidiaries purchases insurance from the captive.

In little more than a decade, captives have substantially changed the way that corporate America approaches insurance. In the past, American businesses would purchase their insurance from large commercial insurance carriers just like everybody else. Now, American businesses typically use their captive insurance company to underwrite their insurance needs, and then have the captive go out into the worldwide reinsurance market to acquire excess or catastrophic coverage. The efficiency is thus gained by cutting out the “middlemen”, i.e., the commercial carriers who themselves were setting off their losses through reinsurance — corporate America now retains those underwriting and investment profits themselves and accesses the reinsurance markets directly if at all.

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