minimize risks, and optimize their insurance programs. The strategic advantages gained through captive insurance can contribute to the long-term success and sustainability of organizations across various industries. 2.2 Basic Concepts Captive insurance, as a specialized risk management strategy, involves several key terms that are essential to understanding its concepts and processes. Here is an explanation of the ten fundamental terms in captive insurance: 1. Captive insurance: Captive insurance refers to the establishment of an in-house insurance subsidiary by a company to cover its risks and protect its assets. The parent company forms the captive to assume and manage its insurance risks instead of relying solely on external issuers. 2. Parent company: The parent company is the entity that establishes and owns the captive insurance subsidiary. It is the company seeking to manage its risks and gain more control over its insurance programs by creating its captive. 3. Risk retention: Risk retention is a fundamental concept in captive insurance. It involves the parent company retaining a portion of its risks within the captive instead of transferring them entirely to external insurance companies. This allows the parent company to have more control over its insurance program and tailor it to its specific needs. 4. Underwriting: Underwriting is the process of assessing risks, setting premiums, and determining coverage terms and limits for insurance policies. In captive insurance, underwriting decisions are made internally by the parent company or its designated underwriting team, providing the flexibility to design insurance policies aligned with its risk appetite and business objectives. 5. Premiums: Premiums are the payments made by the parent company or affiliated entities to the captive in exchange for insurance coverage. These payments contribute to the funds of the captive, which are used to cover potential claims and operating expenses. 6. Claims: Claims are requests made by the parent company or insured entities to the captive for reimbursement or coverage of losses or damages incurred. The captive evaluates and processes these claims based on the terms and conditions outlined in the insurance policies. 7. Loss Reserves: Loss reserves are funds set aside by the captive to cover potential future claims and liabilities. These reserves act as a financial buffer, ensuring that the captive has sufficient resources to fulfill its obligations to policyholders. 8. Reinsurance: Reinsurance is the practice of transferring a portion of the risks assumed by the captive to external insurance companies, known as reinsurers. Captives use reinsurance to spread the risk and protect against large losses. Reinsurers assume a share of the captive’s risks in exchange for a premium, reducing the captive’s overall exposure. 9. Fronting Company: A fronting company is an external insurance company that provides the regulatory and administrative functions for the captive, while the captive assumes the
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