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Captive Question

Discussion in 'SA3' started by wwatson, Jan 1, 2022.

  1. wwatson

    wwatson Keen member

    Seen this many times, but I actually have no clue what it really means

    " ... using captive means the company will have direct access to the Reinsurance market .... hence able to place larger risk ... and get better rates ..."

    I thought captive is just an insurance company set up and wholly owned by a company (e.g. Coca Cola / Fedex etc.) to provide insurance to its parent.

    Where does the direct access to the Reinsurance market come from?

    Can anyone help me out here :)
     
    wwatson, Jan 1, 2022
    #1
  2. mugono

    mugono Ton up Member

    Hello,

    Setting up the captive will enable Coca Cola / FedEx to deal ‘directly’ with a reinsurer. Reinsurers enter into contracts of insurance. They are unable to transact with counter parties who do not have the requisite permissions to write insurance business.
     
    mugono, Jan 1, 2022
    #2
  3. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    Just to clarify what mugono has said here, reinsurers enter into contracts of reinsurance with either insurance companies or other reinsurers (in which case strictly this is retrocession business).

    Reinsurers are not licensed to write direct insurance business with the likes of Coca Cola / FedEx, etc . However, they can reinsure a captive which is itself an insurance company.
     
    Darren Michaels, Jan 4, 2022
    #3
  4. wwatson

    wwatson Keen member

    so am I right saying that the savings to Coca Cola / Fedex come from not having to cede their risks to an external insurer? because the external insurer which would charge the enterprise for its reinsurance cost in Coca Cola / Fedex insurance premium?

    I did not know that reinsurers are not licensed to write direct insurance business! Most reinsurers seem to be writing risks with large commercial enterprises. So either they are insuring the captives of the enterprises, or they are actually both insurer & reinsurer. Is that right Darren?

    Thanks both for answering.
     
    wwatson, Jan 7, 2022
    #4
  5. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    Remember an external insurer will be in business to make money, so by keeping the premiums within the group, Coca Cola / Fedex, saves passing on profit to an external insurer.

    Whether or not a specific reinsurer is licensed to write direct business as well as reinsurance business, will inevitably depend on the licences they have in place and the regulatory requirements in the territory concerned.
     
    Darren Michaels, Jan 10, 2022
    #5

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