By definition, a captive is an insurance company approved by the prudential regulators. As such, it is subject to the same laws and regulations as a traditional insurance company.
Unlike a traditional insurer, a it is created and owned either by one company, or by several companies or a group of companies whose core business is not insurance.
In its simplest configuration, it is an insurance company that covers only the risks of its parent company. It may insure some or the entirety of its risks.
This description, however, seems insufficient and does not reflect the way in which these entities have developed over time.
Today, these companies can be described as a lambda insurer or reinsurer that focuses on risks with a limited origin. This may be due to a specific geographic location, an exclusive class of business or limited access to risks.
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Development of captive insurance companies
The origin of captive insurance companies is difficult to establish, as it is difficult to determine the first financial and legal arrangement that led to them. Nevertheless, everyone agrees that the Anglo-Saxons are the originators.
It is established, indeed, that "a certain form" of companies developed around 1870 when the first P&I clubs were created.
It was in 1893 that the concept crossed the Atlantic and arrived in America in its current form. The American Credit Indemnity of New York insured the risks of its parent company, the Commercial Credit Company.
In Europe, Imperial Chemicals Insurance Ltd was the first captive insurance company to appear in Great Britain in 1920.
In fact, this phenomenon in its present form has its origins in the mutual insurance and co-insurance companies that were widespread in the 1920s and 1930s. However, the real growth of this type of business dates back to the early 1950s with the desire of parent companies to establish their insurance companies abroad.
The term "captive", derived from the expression "captive mines", appeared in 1950 in Ohio, a Midwestern American state. At that time, The Youngstown Sheet & Tube Company owned and operated mines whose production was used exclusively by its plants.
The initiator of the project, Frederic M. Reiss developed financial arrangements that allowed The Youngstown Sheet & Tube Company to create its own insurance companies. These companies covered only the group's mines.
Over the next three or four decades, the number of these insurers grew exponentially. Today, there are several thousand operating worldwide. Even if, according to the sources, their estimate evolves strongly, there would be, according to AM Best, nearly 7000 companies against 1000 in 1980, underwriting tens of billions of dollars in premiums.
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