Companies that use captive insurance companies to manage risk are increasingly being victimized by excess insurance companies and reinsurers that participate in their insurance programs. Excess insurers and reinsurers know when they are insuring or reinsuring a risk that uses a captive insurer for claims handling and decision-making, yet when a large claim must be paid, they may feign surprise and seek to use the captive’s relationship with the policyholder as a way to resist paying claims by casting suspicion on the captive’s claims decisions. Captives and their owners can proactively avoid some of these common pitfalls.
Background
In a common captive insurance structure, a large company will create an insurance company subsidiary that collects premiums from the parent and other subsidiaries, sells them insurance, investigates and resolves claims, and perhaps handles other risk management functions. The captive will absorb the typical claims, but the corporate family will be protected from the largest losses by high-level excess insurance for the captive insurer itself, or reinsurance. This type of program may help to manage and spread a company’s risks in an economically favorable fashion, with enhanced risk management oversight over developing problems and claims control. Through the underwriting process, excess insurers or reinsurers will know when they are writing insurance in excess of a captive’s policy.
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