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Tuesday, September, 29, 2009

GEICO Gecko Need Not Apply: The Captive Insurer

You won't see cute, little ads with a duck or gecko for captive insurers. Nor will you hear them being excoriated in whatever policy (pun intended) debates are kicking around D.C. In fact, you don't really hear much about them at all. Toolbox had never heard of captive insurance before today, yet it's been around since the 1950s. And everything Toolbox knows about captive insurers comes from today's first download, The Captive Concept, by Arthur G. Koritzinsky (Marsh, Inc.). The first thing Toolbox learned is that captive insurers are not insurance companies that are not even being held hostage. Rather, they were the ingenious creation of Frederic M. Reiss, who was representing the Youngstown Sheet & Tube Co., (o.k., Toolbox got that part from Google) of Supreme Court decisional fame. This original captive insurer was set up by the company to insure its own mines. At its most base, this was kind of self-insurance. Cool.

Koritzinsky's submission provides "an introduction to the nature of captive insurers, the rationale behind their utilization and the process for bringing such an entity into existence." He explains captives, their advantages (financial and issuance), their disadvantages and the process by which one is established. In brief, "A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent or a number of similar corporations (e.g., trade associations) thereby contributing to a reduction in its parent's total cost of risk." Companies establish them for any number of reasons, including

lack of commercial market for certain lines of coverage;
desire to recapture underwriting profits and investment income that would otherwise be earned by the commercial underwriter;
as a means to access the reinsurance market; or
in certain circumstances, as a means of diversifying into insurance services.

Toolbox likes the last one and is thinking of setting up Youngstown Hammer & Nail Captive Insurance, Inc. We'll figure out what it insures later.

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