Why Parents Fold Their Captive Insurance Companies

As is the case with virtually any type of business, not all captive insurance companies stay in business indefinitely.

"Nothing lasts forever," said Thomas Hodson, director, executive vice president, and general counsel in Hartford, Connecticut, with SOBC DARAG, which, among other things, will take over and wind down captive insurance companies for their parents. The company has acquired captives in several US domiciles, as well as Bermuda.

Speaking October 22, 2019, at a session at the annual Captive Insurance Council of the District of Columbia conference in Washington, DC, Mr. Hodson noted that there are several reasons why parents fold their captives.

One major reason is a change in traditional market conditions from the time a captive was established. Captives often are set up to help parent companies cut their insurance costs when premiums are soaring for coverages in the traditional market. Those savings, though, can be wiped out when premiums fall amid softening conditions in the traditional market, Mr. Hodson noted.

Another reason fueling parent interest in folding their captives are corporate mergers in which the companies that are merging each have captives, or, in some cases, multiple captives, which Mr. Hodson noted, the merged company doesn't need.

By shifting their captives to an outside firm, such as SOBC DARAG, captive parents can eliminate the costs, such as payment of fees to captive managers, as well as domicile premium taxes.

"Cutting expenses can be huge. We can bring things in-house and we can reduce expenses" significantly when buying a captive from its parent, Mr. Hodson said.