The role of captive insurers in the insurance and risk financing Essay

The role of captive insurers in the insurance and risk financing market - Essay Example The paper tells that captive insurance has been in practice since the mid-19th century. Not satisfied with the insurance and costs involved, companies in the mid-19th started operating their own insurance resources. To cite some examples, there were the American ship owners, not content from the insurance services of the Lloyd’s of London and created Atlantic Mutual in the 1840s. Later in the 1960s, there came a boom period for captive insurance when a number of American corporations jumped into insurance business by creating their individual insurers. By 1990s and 2000s the captive insurance business thrived with the hardening of insurance market, reporting innumerable malpractices in medial and professional responsibility area. Growth in the captive insurance business has been unprecedented, fuelling their demand need globally. Taking it from the Swiss Re reporting of 2003, in 2001 the insurance premium paid by 2,500 of the major world corporations represented 13% business o f the global commercial insurance but the share of captive insurance in that was 80%. Presently, captive insurance is not just reserved to private entities; even government organisations like the U.S. Federal Emergency Management Agency (FEMA) have entered into forming their own captives. Business of captive insurance grows rapidly in such domesticates worldwide where there are lenient regulatory controls in comparison to fully grown developed market economies. There are special legislations for such captives in lenient jurisdictions, not asking for initial high capital injection and also offering tax benefits along with making available developed infrastructure in the form of fully functional capital markets and human resources (Skipper and Kwon, 2008). Impact of captives on the commercial insurance market is huge, as they carry on a worldwide shift by commercial entities that desire a more effective and logical tool of financing the risks. Kloman and Rosenbaum (1982)) pointed out that the growth in captive businesses even in the 1980s was because of the unending pressure from the ever-increasing line of sophisticated risk managers to differentiate and verify each and every aspect of routine insurance transactions. It was also said that many big global companies have just outgrown their risk financing capabilities of the routine insurance market, thus strengthening the deficiency of insurance supply through captive and other options of financing arrangements (Skipper and Kwon, 2008). What is Risk Financing? Risk financing is a process to find the most effective way to finance a known risk. In case insurance is easily available through the traditional marketplace at suitable costs, it is preferable but in case of non-availability of insurance at desired costs, risk financing is the right way of insuring risks. It may include researching alternate ways like self insurance by creating a captive insurer (Capstone Associated Services, 2011). What is a Captive Insu rance Company? A Captive Insurer company fulfils primarily the insurance needs of its owners or their associate entities. The parent pools in the growth of the captive that can offer both underwriting profit and investment return. The Captive Insurer not only provides conventional insurance coverage but at the same time covers risks normally not insured in the traditional market. The risk-financing programme of a captive provides flexibility, stability and control (Hodgins, 2012). Companies not in the insurance business get their loss exposures financed by captive insurance entities, the past and most practised type of ART. In captive insurance, the risk gets shifted from the company to the affiliated insurance firm of the company. Such captives are small firms, controlled by specialist captive managers. Captive firms may be simple in structure but their offerings are critically crucial for the interests of their