Insurance Broker Certification Practice Exam

What type of insurer is typically created by companies to cover their own risks?

1. Commercial insurer

2. Mutual insurer

3. Captive insurer

4. Foreign insurer

The correct answer is: Captive insurer

The correct choice is captive insurer. A captive insurer is an insurance company that is established by a parent company to provide coverage for its own risks. This arrangement allows the parent company to manage its risk and insurance costs more effectively, as the captive insurer is tailored specifically to meet the needs of the parent company. Captive insurance provides several advantages, including enhanced control over claims and underwriting processes, potential cost savings, and the ability to create customized insurance solutions that are aligned with the unique risk profile of the parent company. Additionally, this structure often allows the parent company to retain any profits generated by the captive, further benefiting its financial position. In contrast, commercial insurers are typically independent entities that offer insurance policies to a wide range of clients, mutual insurers are owned by their policyholders, and foreign insurers are those that are incorporated in a different country from where they are operating, none of which specifically cater to a company's internal risk management needs in the manner that a captive insurer does.