Which statement best describes captive programs?

Which statement best describes captive programs?

• A. A captive collects premium, issues policies, purchases reinsurance, invests assets and pays losses, just like any other insurer.
• B. Risk retention groups were originally formed in direct response to the lack of workers compensation coverage available in insurance markets.
• C. In a protected cell company, each organization keeps its own premium and loss account, but a member may access the assets of another member in the event the member becomes insolvent.
• D. Under rent-a-captive arrangement, no risk transfer occurs among the members, and the capital rented by one insured cannot be diminished by the losses of another insured in the structure.

Answer: (A)

Captive programs are owned by the insureds they cover and operate as a licensed insurer dedicated to those risks. The key idea is that the captive functions just like a conventional insurer: it collects premiums, writes policies, purchases reinsurance to spread risk, invests the collected assets, and pays losses. This insurer-like operation is what makes a captive program distinct from other risk-financing arrangements, because it combines ownership by the insureds with formal underwriting and claims handling governed by regulatory requirements. The other statements describe different structures: risk retention groups are a separate form formed to provide liability coverage and aren’t the standard captive model; a protected cell company involves segregated cells but asset access across cells is not how they are designed to work; and a rent-a-captive arrangement does involve a captive, but the claim that no risk transfer occurs and that capital cannot be affected by another member’s losses contradicts how these arrangements are typically structured.

Captive programs are owned by the insureds they cover and operate as a licensed insurer dedicated to those risks. The key idea is that the captive functions just like a conventional insurer: it collects premiums, writes policies, purchases reinsurance to spread risk, invests the collected assets, and pays losses. This insurer-like operation is what makes a captive program distinct from other risk-financing arrangements, because it combines ownership by the insureds with formal underwriting and claims handling governed by regulatory requirements.

The other statements describe different structures: risk retention groups are a separate form formed to provide liability coverage and aren’t the standard captive model; a protected cell company involves segregated cells but asset access across cells is not how they are designed to work; and a rent-a-captive arrangement does involve a captive, but the claim that no risk transfer occurs and that capital cannot be affected by another member’s losses contradicts how these arrangements are typically structured.