captive insurance
A wholly owned subsidiary created by a parent company to provide insurance coverage, allowing businesses to self-insure against specific risks.
Example
“The Fortune 500 company formed a captive insurance subsidiary in Bermuda to insure risks its commercial insurers wouldn't cover.”
Memory Tip
CAPTIVE insurance = company creates its own private insurer. Controls the coverage and keeps the premiums.
Why It Matters
Captive insurance matters because it allows larger companies to reduce insurance costs by taking direct control of their risk management rather than relying solely on traditional insurers. This can lead to significant savings and better coverage tailored to a company's specific needs, which ultimately affects profitability and financial stability.
Common Misconception
Many people mistakenly believe that captive insurance is the same as self-insurance or that any company can easily set one up. In reality, captive insurance requires substantial capital reserves, regulatory compliance, and is typically only practical for large organizations with significant and predictable insurance needs.
In Practice
A multinational retailer with 500 locations might establish a captive insurance subsidiary to cover property damage and liability claims across all stores. Instead of paying $10 million annually to traditional insurers, the company funds its captive with $8 million yearly, retaining the investment returns and unused premium portions while maintaining full control over claims management and coverage decisions.
Etymology
CAPTIVE (wholly owned, controlled) INSURANCE. An insurance company CAPTURED (owned) by its insured parent.
Common Misspellings
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See Also
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