Creation of a regular captive insurance company is an expensive undertaking. Formation of a captive insurance company involves the work of attorneys, actuaries, underwriters and other professionals. Large non-deductible capital contributions are also required. Furthermore, the captive must satisfy “insurance” requirements, including risk pooling or risk sharing, and must qualify as an insurer under the appropriate sponsoring legislation. This is an expensive solution when used in isolation. The expense of a captive insurer arises from its role as a direct insurer of risk. The captive takes on the role of the front-line insurance company. Nevertheless, the formation of a regular captive insurance company may be justified in some circumstances.
This burden can be almost entirely avoided by transferring the primary insurance function to a direct insurer. The direct insurer is a fully qualified insurance company that satisfies the insurance element of the arrangement by working with many insureds and many reinsurance companies. Multiple reinsurers can enter into contractual agreements with a single direct insurer. The reinsurers do not need to meet the burdensome requirements of the direct insurer such as excessive reserve requirements, over-burdensome regulatory filings, and invasive oversight. These requirements are already met by the direct writer of the insurance.