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Top 10 Benefits and Risks of Forming a Captive

Every risk financing alternative, with the possible exception of guaranteed cost insurance, has benefits and risks. A risk manager must be prepared to make an informed decision regarding whether, and how, an organization should embark on the path of forming a captive.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | Updated on July 22, 2013

Every risk financing alternative, with the possible exception of guaranteed cost insurance, has benefits and risks. The key to success, especially with captives, is to correctly compare the salient benefits with the riskiest drawbacks for each organization. 

The National Association of Insurance Commissioners defines a captive as an insurance company that is created and wholly owned by one or more non-insurance companies to insure the risks of its owner or owners—essentially a form of self-insurance whereby the insurer is owned wholly by the insured. Captives are typically established to meet the risk-management needs of the owners or members, and the entities forming captives range from major multinational corporations—the vast majority of Fortune 500 companies have captive subsidiaries—to nonprofit organizations. Once established, the captive operates like any commercial insurance company and is subject to state regulatory requirements including reporting, capital and reserve requirements.

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