What defines a captive in the context of insurance?

A captive in the context of insurance is defined as an insurance subsidiary that is created to finance the risks of its parent organization. This structure allows businesses to effectively manage their own risk by self-insuring certain liabilities while also maintaining control over the underwriting and claims process. By doing so, they can tailor the coverage to their specific needs, reduce insurance costs, and potentially foster better risk management practices.

Captives provide businesses with flexibility in the terms and conditions of coverage and can offer financial benefits, including potential tax advantages and the ability to retain profits within the organization, rather than paying them to third-party insurers. This arrangement typically works well for larger companies or groups with unique risk profiles that are not well served by standard insurance offerings.