Captive Glossary

A captive insurance company that elects to be taxed under Section 831(b) of the Internal Revenue Code, allowing it to be taxed only on investment income if annual written premiums do not exceed a specified threshold. These captives must meet strict requirements regarding risk distribution, ownership structure, and business purpose to qualify for this tax treatment.

A detailed analysis performed by actuaries to evaluate the financial implications of risk retention through a captive insurance company. The study examines loss histories, exposure data, and industry trends to determine appropriate premium levels and reserve requirements.

Assets recognized by regulatory authorities as acceptable for meeting capital and solvency requirements. These typically include cash, investments, and certain receivables that meet specific quality and liquidity standards.

A captive insurance company owned by an insurance agency or brokerage to insure risks of their clients, often used as a means of participating in underwriting profits and securing additional capacity.

A contract where the outcome depends on uncertain events affecting both parties' obligations. In captive insurance, this fundamental principle means both the insurer and insured are subject to chance - the captive collects premiums but faces uncertain claim payments, while the insured pays fixed premiums but receives benefits only if losses occur.

A broad range of risk financing methods that go beyond traditional commercial insurance, including captives, risk retention groups, finite risk programs, and other innovative structures. ART solutions typically offer greater control over risk management, potential cost savings, and customized coverage approaches.

A captive insurance company owned by members of a trade or professional association to insure risks common to the industry or profession they represent.

A contractual modification that formally transfers specific liabilities from one party to another in an insurance arrangement. In captive programs, ALEs are often used in fronting arrangements or when restructuring existing coverage to clearly define which entity assumes particular risks.

The lowest amount of capital required by a domicile's regulatory authority to establish and maintain a captive insurance company. This varies by jurisdiction and type of captive structure.

A detailed report provided to reinsurers or regulators that lists insurance policies written, premiums collected, and claims paid during a specific period. In captive operations, bordereaux are essential tools for tracking risk exposures, monitoring program performance, and ensuring compliance with reinsurance agreements.

An actuarial method that combines initial expected loss ratios with actual loss development patterns to estimate ultimate losses. This technique is particularly valuable for captives with limited loss history or when recent loss experience may not be indicative of future results.

A captive insurer established as a branch of an offshore captive insurance company, allowing it to operate in a different jurisdiction while maintaining its primary domicile elsewhere.

The pure loss cost of an insurance program expressed as a percentage of the exposure base, typically calculated using historical loss experience adjusted for trending and development. Captives use burning cost analysis to help determine appropriate premium levels and evaluate program performance.

A comprehensive document required for captive formation that outlines the proposed operations, including coverage types, risk management strategies, financial projections, and investment policies.

A wholly-owned subsidiary of a parent company that provides insurance coverage for the parent and its affiliates.

A professional service provider who oversees the day-to-day operations of a captive insurance company, including regulatory compliance, financial reporting, and coordination with service providers.

When a captive provides reinsurance coverage to the parent company's primary insurance policies.

The act of transferring risk from one insurer to another through reinsurance. In captive programs, cedence often occurs when the captive transfers portions of its risk to reinsurance markets to protect against large losses or to comply with regulatory requirements.

A segregated portion of a protected cell company that insures the risks of a specific participant while keeping assets and liabilities legally separate from other cells.

An insurance policy that responds to claims filed during the policy period, regardless of when the actual incident occurred, subject to retroactive dates and extended reporting periods.

Assets or financial instruments required by fronting carriers or regulators to secure a captive's obligations, often in the form of letters of credit, trust accounts, or pledged investments.

A measure of underwriting profitability calculated by adding the loss ratio and expense ratio, with a ratio under 100% indicating an underwriting profit.

A contract that terminates reinsurance obligations and provides for the final settlement of all current and future claims between the parties. Captives may use commutation agreements as part of their run-off strategy or to eliminate long-term liabilities with reinsurers.

The amount of each claim the captive's parent company must pay before the captive's coverage applies.

The portion of expenses associated with acquiring new insurance business that is capitalized and amortized over the policy period rather than expensed immediately. For captives, DAC accounting helps match costs with premium revenue and provides a more accurate picture of program profitability.

A tax imposed by some states on insurance purchased directly from insurers not licensed in that state, including captives. The tax rate and applicability vary by jurisdiction.

Adjusting loss reserves to account for the time value of money.

The jurisdiction where a captive insurance company is licensed and regulated. Each domicile has its own regulatory requirements, tax implications, and operating environment.

A captive owned by a subsidiary rather than the parent company.

A small captive insurance company that primarily insures enterprise risks of its parent organization, often structured to qualify for tax benefits under IRC 831(b).

Insurance that provides protection above a specified retention level or primary policy limit, commonly used in captive programs to manage large loss exposures.

A tracking mechanism used to monitor the profitability of specific coverage programs within a captive, often used to determine profit-sharing arrangements or premium adjustments.

A comprehensive analysis conducted to determine whether forming a captive insurance company is financially and operationally viable for a specific organization or group.

Federal legislation enacted in 1986 that allows businesses with similar liability exposures to form Risk Retention Groups (RRGs) to self-insure their liability risks across multiple states. The Act provides significant regulatory advantages by allowing RRGs to operate nationwide while being regulated primarily by their domiciliary state.

A U.S. federal law requiring foreign financial institutions, including offshore captives, to report information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold substantial ownership. Compliance is crucial for captives to avoid significant withholding penalties on U.S.-sourced payments.

A structure where a licensed commercial insurer issues policies to insureds and cedes some or all of the risk to a captive through reinsurance, typically used when insureds require admitted paper.

A legal document provided by an attorney confirming that a captive's structure and operations comply with relevant laws and regulations in both the domicile and operating jurisdictions.

A captive insurance company owned by multiple, usually unrelated organizations that come together to share risks and achieve economies of scale in their insurance program.

A period in the commercial insurance market characterized by reduced capacity, stricter underwriting standards, and higher premiums, often leading to increased interest in captive solutions.

Federal legislation that establishes standards for the protection and confidential handling of protected health information. Captives writing medical stop-loss or other health-related coverages must comply with HIPAA's privacy and security requirements.

Similar types of exposures that share common characteristics, often a consideration in structuring group captives and risk retention groups.

The minimum rate of return that a captive must achieve on its investments or operations to meet its financial objectives and justify its continued operation. This metric helps owners evaluate the captive's performance against alternative risk financing options.

An actuarial estimate of losses that have occurred but haven't yet been reported to the captive, used in determining reserve requirements and financial reporting.

A captive insurance company that insures the risks of industrial insureds, typically requiring the insureds to meet certain minimum requirements regarding size, sophistication, and risk management capabilities.

A collection of analytical tools and databases used by state insurance regulators to monitor the financial condition of insurance companies. While traditional IRIS ratios may not directly apply to captives, similar financial metrics are often used by domiciliary regulators.

Transferring captive risks to the capital markets.

A measure of a captive's ability to meet its short-term obligations using its most liquid assets. Regulators often monitor this ratio to ensure captives maintain sufficient liquid assets to pay claims and other immediate expenses.

Arrangements where a captive loans funds back to its parent company or affiliates. While potentially beneficial for cash management, loan-backs are typically subject to strict regulatory oversight and limitations to ensure the captive maintains adequate funds for claims payment.

The ratio of incurred losses and loss adjustment expenses to earned premiums, a key metric in evaluating a captive's underwriting performance.

The worst loss that could reasonably be expected to occur in a given risk scenario, assuming the failure of primary protection systems (like sprinklers or other safety measures) but with secondary protection systems (like fire walls) remaining intact. It's commonly used in property insurance and risk assessment.

A small captive insurance company that elects to be taxed under IRC 831(b), allowing it to be taxed only on investment income if it meets certain premium thresholds and other requirements.

A tax imposed by the domicile based on the captive's premium volume, often with specified minimum amounts regardless of actual premium written.

An insurance company owned by its policyholders rather than stockholders. Any profits are either retained by the company or returned to policyholders as dividends or reduced premiums. Policyholders have voting rights in company decisions.

The U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, DC, and five U.S. territories. The NAIC develops model laws, provides guidance, and coordinates regulatory oversight in the insurance industry.

The total premium retained by an insurer after deducting reinsurance premiums paid to reinsurers. It represents the amount of premium for which the insurer remains directly at risk.

An insurer not licensed to do business in a particular state but may still write coverage there through surplus lines brokers. These insurers are also called surplus lines carriers or unauthorized insurers.

Reinsurance placed with reinsurers that are not licensed or accredited in the ceding insurer's state of domicile. The primary insurer generally cannot take credit for this reinsurance on its financial statements unless the reinsurer posts collateral.

A foreign corporation where U.S. shareholders own less than 50% of the voting power or value of shares. This designation affects how the corporation's income is taxed under U.S. tax laws.

A type of reinsurance where the reinsurer pays only when losses exceed a specified amount (retention or priority). The reinsurer's liability is not proportional to the premium. Common forms include excess of loss and catastrophe reinsurance.

Financial instruments designed to transfer operational risks from organizations to capital markets. These securities help companies manage risks associated with operations, systems, processes, and human factors.

A captive that operates alongside a traditional commercial insurance program.

A promise by the parent organization to provide financial support to its captive if needed.

A legal structure that allows multiple captive programs to operate under a single corporate entity while maintaining segregation of assets and liabilities between cells.

A captive insurance company that insures only the risks of its parent organization and affiliates, also known as a single-parent captive.

A captive insurance company that meets specific IRS requirements to be treated as an insurance company for federal tax purposes, including risk distribution and risk shifting.

An unincorporated captive structure where members exchange insurance coverage.

The minimum amount of capital and reserves a captive must maintain to be licensed and remain solvent.

The amount the captive pays to reinsure the risks it has underwritten.

A risk-financing facility that provides captive benefits to organizations without the need to form their own captive, typically through participation in a segregated cell program.

The spreading of risk across a sufficient number of independent exposure units to satisfy insurance tax requirements and achieve statistical predictability of losses.

The amount of risk a company is willing to bear itself rather than transferring to an insurance provider.

A liability insurance company owned by its members and formed under the federal Liability Risk Retention Act, allowing it to operate in multiple states while being regulated primarily by its domiciliary state.

The transfer of the financial consequences of potential losses from the insured to the insurer, a requirement for qualifying as insurance for federal tax purposes.

Combining the risks of multiple organizations within a captive to spread loss exposures.

A type of captive insurance company specifically designed to provide financial guarantee insurance or reinsurance. SPFIs are typically used to insure against financial risks, such as credit default risks, investment risks, or other financial obligations. These specialized captives often operate under specific regulatory frameworks that recognize their unique role in financial risk management and may have different capital requirements and investment restrictions compared to traditional captives.

A legally protected portion of a protected cell company with its own assets and liabilities, similar to a cell captive but with potentially different regulatory requirements.

When a company retains the risk of loss within the organization rather than transferring it to an external insurance provider.

A legal entity created for a specific insurance or reinsurance purpose, often used in conjunction with captive programs for risk transfer or financing.

A captive that provides insurance capacity to unrelated organizations for a fee.

A tax imposed on insurance coverage placed with non-admitted insurers, including many captives, with rates and filing requirements varying by jurisdiction.

Risks insured by a captive that don't belong to its parent organization, often used to enhance risk distribution and generate additional premium income.

Formal criteria established by the captive to evaluate and price risks, including coverage terms, exclusions, and rating factors.

The profit earned by a captive from premiums collected compared to claims paid.

A captive owned by a parent company to insure the risks of its subsidiaries.

A premium calculation method that adjusts rates based on actual loss experience, commonly used in group captives and risk retention groups.

The traditional commercial insurance market where coverage is readily available, as opposed to alternative risk transfer mechanisms like captives.