What is a captive insurer?

A captive insurer is specifically a subsidiary formed to cover the specific risks of its parent company or companies. This type of insurer is created to provide tailored insurance solutions that meet the unique needs of its parent organization, allowing for greater control over risks, costs, and insurance coverage. Captive insurance can provide advantages such as reduced premiums, improved cash flow management, and customized policy terms that may not be available in the traditional insurance market.

Unlike other options, which describe different aspects of the insurance market, the function of a captive insurer centers solely on the relationship between the parent organization and its subsidiary insurance entity. For instance, the notion of covering all market risks does not align with the specific focus captive insurers have on tailored risks. Similarly, a government entity that regulates insurance is an unrelated concept, as is an independent company that offers competitive rates; these options reflect broader insurance market dynamics rather than the unique structure and purpose of a captive insurer.