The term ‘captive’, also known as ‘captive insurance’, refers to a company-owned insurance firm that covers the risks of its parent company, which is usually a large industrial firm.

In such cases, this is referred to as self-insurance or captive insurance, whereby a company pays the risk premiums to its own captive insurance company.

Unlike in the case of → Excess A captive insures corporate risks outside the core balance sheet. As a result, despite the high financial outlay and operating costs involved, captive companies can play a key role in targeted risk management and cost optimisation. For this to be the case, the running costs of a company’s own captive solution must be lower than the cost of insurance premiums on the insurance market.

The aim is to reduce the total cost of risk by adjusting the premium level in line with the parent company’s actual claims history. Developments in the insurance market are not relevant in this context.

Depending on the scale of the risks involved and a company’s insurance requirements, self-insurance may be provided either in full or in part through the captive subsidiary. Where the captive provides full cover, it assumes all the responsibilities of a primary insurer.

Source reference: See the VDT publication “VDT Article Series, Part 5 | Glossary“ and the source cited there.