In a number of industries, businesses partially self-insure their risks. A typical commercial insurance policy contains numerous exclusions and a sizable deductible. And many business-specific risks are not economically insurable on the commercial market. For example, a manufacturing business may bear risks for products liability, pollution, natural disasters and for the loss of key employees, customers or suppliers.
To manage these risks, a business may consider implementing a so-called captive insurance company, or captive. A captive is a privately held business entity that is licensed and regulated to insure related parties’ risks. Often, a business will organize a captive to focus management attention on risk management. As an added benefit, in the process of establishing the captive, the business will often find that it can reduce overall insurance costs.
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