Glossary of Captive Insurance Terms
Captive insurance involves a specialized form of insurance arrangement where a company forms its insurance subsidiary to cover its risks. Understanding the terminology associated with captive insurance is crucial for effectively navigating this complex field. Here's a glossary of key terms:
1. Captive Insurance:
A subsidiary company established by a parent organization to underwrite the risks of the parent and affiliated entities.
2. Parent Company:
The company that establishes and owns the captive insurance subsidiary.
3. Reinsurance:
The practice of insurers transferring portions of their risk portfolios to other parties to reduce their exposure to losses.
4. Fronting Company:
An insurer that issues insurance policies on behalf of a captive insurance company, while the captive assumes the risk and retains the premiums.
5. Domicile:
The jurisdiction in which a captive insurance company is licensed and regulated.
6. Risk Retention Group (RRG):
A type of captive insurance company formed under the provisions of the Liability Risk Retention Act of 1986 to provide liability insurance to its members.
7. Pure Captive:
A captive insurance company that only insures the risks of its parent and affiliated entities.
8. Group Captive:
A captive insurance company that insures the risks of multiple unrelated entities within a specific industry or affinity group.
9. Single-Parent Captive:
A captive insurance company that is wholly owned and controlled by a single parent company.
10. Cell Captive (Protected Cell Company):
A captive insurance company structure that segregates assets and liabilities into individual "cells" to allow multiple parties to participate in the captive while maintaining separate risk profiles.
11. Association Captive:
A captive insurance company formed by a group of similar businesses or organizations to collectively insure their risks.
12. Risk Management:
The process of identifying, assessing, and managing risks to minimize the impact of uncertainty on an organization's objectives.
13. Underwriting:
The process of evaluating and accepting risks for insurance coverage, including determining premiums and policy terms.
14. Premium:
The amount paid by an insured party to an insurer for insurance coverage.
15. Loss Ratio:
The ratio of incurred losses and loss adjustment expenses to earned premiums, used to assess the profitability and performance of an insurance company.
16. Claims Handling:
The process of receiving, investigating, and settling insurance claims made by policyholders.
17. Solvency:
The ability of an insurance company to meet its financial obligations, including claims payments, regulatory requirements, and other liabilities.
18. Risk Pooling:
The practice of spreading risk across multiple policyholders or entities to reduce the impact of individual losses.
19. Fronted Program:
An insurance program in which a fronting company issues policies on behalf of a captive insurance company, typically for regulatory compliance or access to markets.
20. Regulatory Compliance:
Adherence to laws, regulations, and regulatory requirements governing the establishment and operation of captive insurance companies in a particular jurisdiction.
Understanding these terms is essential for effectively managing captive insurance arrangements and navigating the complexities of the captive insurance industry.