Creating a captive insurer is an option in risk management and risk assessment that some very large companies take when they find that insurance premiums on the open market for their particular risks are excessive. By definition, a captive insurer typically exists to serve the needs of its corporate parent and affiliated companies, but sometimes one also can be licensed to write policies for unrelated entities, usually with an eye towards spreading its administrative costs over a larger volume of business.
Setting up a captive insurance company requires passing various regulatory hurdles (usually with a state insurance commissioner) and involves considerably more administrative costs than do self-insurance schemes. However, the premiums paid from the parent or related companies to a captive insurer typically are deductible for income tax purposes, and thus may offer tax advantages over self-insurance, since contributions to self-insurance reserves usually are not deductible.
In some cases, a captive insurer can serve customers of its parent or affiliated firms, either as its main purpose or in addition to insuring the parent or affiliated firms. In the health insurance market, for example, several large hospital systems offer their own health insurance plans to patients, and more are considering doing so. (See "Hospital Systems Branch Out As Insurers," The Wall Street Journal, December 17, 2012>.) In 2010, about 10% of community hospitals were affiliated with entities that offered their own health insurance plans. A 2011 survey indicates that 20% of leading hospital systems plan to offer health insurance coverage to patients. The downside of such plans to patients is that they limit them to a given roster of doctors and hospitals, much like a typical HMO. However, in regions where a given hospital system is dominant, and has large numbers of affiliated doctors in a broad spectrum of specialties, this objection is less important.
By offering their own health insurance plans, hospital systems feel that they can better manage their patients (largely through having access to fuller data about them, such as when they go out of network) and thus their costs. Independent health insurance companies are unhappy with this development and periodically engage in reimbursement and denial of claims wars with these hospital groups.
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