Accounting Best Practices, Fifth Edition

11–19. Rent a Captive Insurance Company

Companies are having increasing difficulty obtaining reasonably priced insurance of all types, if they can obtain insurance at all. Captive insurance companies have been used to provide access to insurance. They are run by a single company, an association of companies, or by an entire industry in order to solve particular insurance problems. Though the use of captive insurance companies has been a longstanding option for obtaining at least some of the necessary insurance, this option has required extensive legal analysis, incorporation costs, and significant initial capitalization fees that have limited their use. Also, sharing a captive with other companies has, until now, meant that a company must share in the risks incurred by other companies, which can present an uncomfortably high risk profile.

Over the past few years, changes in the legal requirements for captive insurance companies have brought about the creation of the rent-a-captive. Under this legal structure, a captive insurance company has already been created by a third party that rents it out for use by multiple companies. The structure is usually in the format of “protected cells,” whereby each company using one can shield its contributed capital and surplus from other renters that are also using the captive. Not only does this format prevent a company from dealing with the initial start-up costs of a captive insurance company, but it also allows it to retain any underwriting ...