They Could Have Used a Captive Insurance Company: Anyone With a Unique Risk

We formed and operate the first series LLC in Montana (named Aegis) for captive insurers. Several other firms provide key services such as accounting, audit and actuarial work. Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company

We offer free CLE to CFPs who want to learn about captives.  Our next webinar is November 21st at 9AM, CST.  You can sign up at this link.

 Captive insurance started and then continued growing due to market failure – an economic term that means the free market, for whatever reason, didn’t provide a good or service.  Some risks are simply too new to be properly understood by traditional insurers, forcing companies to form their own insurance companies.  The Ocean Drilling case is a classic example:

During the 1960's plaintiff faced difficulties insuring its drilling rigs. At that time the drilling rig business was written predominately by the Lloyd Syndicate ("Lloyd's"), with the London Market serving as an ancillary market to Lloyd's. As the technology of drilling rigs developed rapidly, Lloyd's adjusted its insurance rates in an attempt to cover itself against potential losses from the new drilling rigs. Because of the limited experience in insuring the new rigs and a number of substantial losses on these rigs, insurance rates increased sharply. By the end of the 1960's, rates were as high as 10 percent of the value of insured vessels, and plaintiff was unable to obtain full coverage of its rigs through the existing insurance market. In response to this dilemma, plaintiff analyzed its history of premiums and losses and determined that establishment of a captive insurer could alleviate the problems that plaintiff faced in the insurance market. In 1968 plaintiff established Mentor as a wholly-owned subsidiary incorporated in Bermuda

 The following article from the Financial Times highlights how auto insurers are trying to underwrite new risks associated with driverless cars.  You can rest assured that as this technology develops, captives, not traditional insurers will lead the way.
 
 Japan’s top insurers are studying new products to brace themselves for the age of self-driving vehicles that could redefine insurance premium burdens for carmakers as well as car parts makers and technology companies.

  Industry studies have forecasted a steep decline in car insurance premiums as the number and severity of accidents fall with the emergence of autonomous vehicles.
 
  But Japanese insurers MS&AD and Tokio Marine say the transition to driverless technology also brings opportunities with the increasing costs to repair cars, the emergence of new risks and changes in the way insurance will be bought.

  “With the mix of self-driving vehicles and traditional cars, there is a possibility that unforeseeable accidents will occur. We expect the weight of new types of insurance products for new risks such as cyber attacks will increase significantly,” said Hideyuki Sakashita, manager at Mitsui Sumitomo Insurance.