Reinsuring Captives - The Specific and Aggregate Approach

Captives can be divided into two basic types, these are either pure captives owned and used by a single parent or group, association and rent-a-captives which have multiple owners and users.

The specific and aggregate approach is adopted by the latter category where a single capital base is at risk from different and unrelated end-users. A captive's capital base could be impacted by the poor loss experience of an individual policyholder and this would in turn affect other policyholders, as with a reduced capital base the captive would either have to reduce its premium or have less capital with which to meet claims.

Captive users are consequently required to protect themselves from individual losses through specific reinsurance and from an aggregation of losses known as aggregate reinsurance to a level that is acceptable to the Captive Manager.

Association and Group Captives are able to purchase this coverage collectively which achieves economies of scale however rent-a-captives operate on a different basis as each end user operates autonomously from the other captive users and must be responsible for purchasing specific and aggregate coverage on their own.