What does the term "captive" refer to in the context of insurance companies?

In the context of insurance companies, the term "captive" specifically refers to an insurance company that is formed to insure the risks of its owners. This structure allows businesses to have more control over their insurance coverage and costs, and it can be particularly beneficial for companies with unique or specialized risks that might not be adequately covered by traditional insurance markets. Captive insurance companies can also provide financial benefits, as they may reduce costs associated with premiums paid to external insurers.

Captives are often created by organizations to create tailored insurance solutions that meet the specific needs and risk profiles of the parent company or its affiliates. This arrangement can lead to significant savings over time when managed properly, and it provides the potential for greater flexibility in policy terms and conditions.

Other options, while related to insurance, do not encapsulate the specific definition of a captive insurance company. For example, the idea of several independent brokers creating a company does not reflect the ownership structure inherent in captives, nor does an emphasis solely on high-risk coverage or a focus on subsidiaries of financial institutions match the primary characteristic of a captive, which centers on insuring the risks of the entities that own it.