Selecting the Right Type of Captive

For a pure captive a premium volume in the region of around $5,000,000 is generally thought necessary to make the cost feasible as opposed to $1,000,000 for a group captive or rent-a-captive. It should however be emphasised that these amounts are subject to case by case variation. For companies who do not wish to be in a group captive but have too low a premium volume a rent-a-captive is often the best option as capital and running costs are significantly less at the initial stages.

2.1. Single Owner Captives vs Group Captives

The most significant difference between a Single-Owner and Group Captive is that a Single-Owner captive is responsible for its own success or failure, as its results will not be affected by the underwriting results of other parties.

2.1. (i) The Advantages of Single Owner Captives over Group Captives

1. The Captive is responsible to one party only.
2. Profits are not shared.
3. Experience is not affected by the poor performance of another party.
4. Decision - making is made quicker.

2.1. (ii) The Advantages of Group Captives over Single Owner Captives

1. Greater Purchasing Power for Services and Reinsurance
2. Losses are diluted amongst all captive users.
3. Greater need to control losses and costs.
4. Greater predictability of results

2.2. Pure Captives vs Rent-a-Captives

Unlike group captives, pure and rent-a-captives remit all underwriting profits to one company and these profits are not impacted by third party underwriting losses. It is generally recognised that Pure (or Single-User) Captives require a premium in the region of $5,000,000 to be economically feasible and are therefore for the larger organisation. Rent-a-Captives can however provide a low-cost first step into the captive market and can often be used to either to test the captive approach or to adopt a captive approach in the shortest time.

2.2. (i) The Advantages of Pure Captives over Rent-a-Captives

1. All operating profits are retained by the captive owner
2. All decisions affecting the captive are made by the owner
3. Capital is not at risk from other users

2.2. (ii) The Advantages of Rent-a-Captives over Pure Captives

1. Low start up costs as capital base already exists
2. Captive Management already in place
3. Speed of start-up as Captive already exists.

2.3. Group Captives vs Risk Retention Groups

Risk retention groups are a form of group captive formed under the Liability Risk Retention Act of 1996. Risk retention groups are licensed as insurers by individual states and avoid the need to obtain a front company to put in front of a captive whereas group captives that are not risk retention groups are not subject to Federal legislation and are normally offshore.

2.3. (i) The Advantages of Group Captives over Risk Retention Groups

1. There is no need to file policies as fronting companies are normally used.
2. Group Captives can normally be formed more quickly
3. There is less regulation affecting how group captives can operate.

2.3. (ii) The Advantages of Risk Retention Groups over Captives

1. There is no need for an issuing carrier, which leads to reduced costs.
2. Potential greater long-term stability due to the need to comply with state regulations.