Can a captive insurer insure other firms apart from its parent company? i.e. will it run like a full subsidiary.
Yes it can. A captive's primary purpose will be to insure its parent company but this doesn't completely preclude insuring others. In fact I believe under some regulatory jurisdictions this is a requirement for obtaining an insurance licence. Having said that, this is not quite the same as "Rent-a-captive", in which the parent company is still effectively self-insuring but without many of the costs associated with setting up a captive of its own.
On reflection, to say that it is still self-insuring is not quite true either. I think this document does a much better job of explaining than I can do here: https://www.fmglobal.com/assets/pdf/rentacaptive.pdf
I think it sums up like this....when an insurer "rents" or uses another captive insurer ( one that is set up to allow others hold a cell/portion). you probably pay a fee for using and thereby avoiding the large administrative cost in setting up your own captive insurance.
As an example, Royal Dutch Shell (the oil company) self-insures through a Swiss-based captive insurance subsidiary Solen Versicherungen, which has been established for over 20 years and operates under Swiss regulatory and tax authorities. S.V. will insure risks from across Shell's numerous companies worldwide. If Shell were to allow S.V. to offer reinsurance to BP say (to increase economies of scale, diversify risk etc), then this would be a "rent-a-captive"
Simon, I'm not an expert on this but that explanation doesn't seem to agree with most of what Google turns up on the matter. Based on that, I would say what you're talking about is simply a captive offering insurance to parties other than its parent. Under "Rent-a-captive" you supply capital to a provider via a letter of credit, benefit from underwriting profits and basically rent the captive infrastructure (claims handling, etc.) from the provider. Hence my original assertion that under Rent-a-captive you are basically still self-insuring, as opposed to your example where BP is insured by Shell.
Hi td290 You are right, my response was a bit sloppy In reply to the orginal question, yes, the captive could insure third-parties. Alternatively the captive could offer up its facilities (capital, admin, regulatory authorisation etc) to a third-party so that the third-party effectively has its own captive, but one that has been "rented" from the original company. The rent-a-captive is set up to insulate the company from the experience in the rent-a-captive. This arrangement may be offered to multiple third-parties each with its own "cell" insulated from the others.
