Optimal Risk Financing In Large Corporations Through Insurance Captives
A captive is insurance or Reinsurance Company established by a parent group to finance its own risks. Captives mix internal risk pooling between the business units of the parent group and risk transfer toward the reinsurance market. The authors analyze captives from an optimal insurance contract perspective. The paper considers the vertical contractual chain that links firstly business units to insurance captives or to "Fronters" through insurance contracts, secondly fronters to reinsurance captives through the cession of risks and thirdly insurance or reinsurance captives to reinsurers through cessions or retrocessions.