What is the purpose of a captive arrangement in insurance?

The purpose of a captive arrangement in insurance primarily revolves around stabilizing coverage for specific exposures. Captive insurance refers to an insurance company that is created and wholly owned by one or more non-insurance entities to insure the risks of its owner(s). This structure allows the owner(s) to tailor coverage specifically to their needs, which can be particularly beneficial for managing unique or specialized risks.

By having a captive, businesses can achieve greater control over their insurance costs and coverage terms. This is especially true for organizations that may struggle to find suitable coverage in the traditional market due to the nature of their risks. Captives can provide stable coverage solutions that might not be available otherwise, helping organizations manage fluctuations in premiums or coverage availability in the commercial insurance market.

This arrangement serves to stabilize the risk management program of the business, ensuring that it maintains continuous and appropriate coverage for its specific exposures without being as heavily affected by market volatility or insurer capacity issues.