THE CAPTIVE MARKET
A GROWTH STORY
If you don’t have an alternative risk transfer program in place, you may soon be in the minority. Insurance industry trends indicate that most middle market businesses will implement a captive or alternative risk transfer strategy over the next few years. In fact, 92% of Fortune 500s use some form of a captive.
Modern captives began in Bermuda in the early 1960’s, and captive insurance was formalized in the late 1970’s, with a medical malpractice captive for Harvard University. In 1986, President Ronald Reagan/Congress passed 831(b) Election into law.
In recent years, the growth of captive insurance and related risk transfer mechanism has boomed driven by businesses seeking to better manage insurance dynamics, including cost, cash flow, claims, service and capacity.
When segregated cells, risk retention groups and rent-a-captives are included, the number of captive and alternative risk arrangements today is in the tens of thousands, and is rapidly growing. In 2018, global insurance premiums exceed USD $5 trillion for the first time.
Beginning in the 1980s, captives were commonly used by Fortune 500 companies to capture insurance premiums. With a captive, these large organizations could insured general liability, worker's compensation, auto and property insurance. These captives soon became a profit center for the entire organization.
Until 2001, IRS regulations largely restricted middle market businesses from using captives. However, in 2001, 2002 and 2005, the IRS issued guidelines that provided “safe harbors” for middle market companies. These new rulings have opened the door to many captive insurance companies being operated out of all 50 states.
Today, captives have become the primary risk management and planning tool for many successful small to mid-sized businesses.