The insurance company itself doesn't pay any of the claims a customer makes. Advance policies allow insurance companies to venture into new areas of business, without assuming the typical risks of doing so. The main purpose of initial insurance is to allow the captive company or organization to issue policies in states where it is not licensed. The other purposes are to comply with insurance regulations and to give captives access to other services, such as claims management and the ability to transfer excessive risks, in a cost-effective manner.
A major insurer must ensure that the policies it issues are working as intended; that is, generally, the insurer will require some type of financial guarantee (often called a guarantee) from the insured or captive reinsurer. This protects the insurer against the insolvency of the insured or captive or other circumstances that may pose a risk to the insurer. Keep in mind that fact-based liability policies can accumulate substantial warranty requirements over time. The captive hires the main insurance company, which issues an insurance policy on paper with the main company's letterhead.
In its most common form, a commercial insurance company (“parent company”), authorized in the state in which the risk to be insured is located, issues its policy to the insured. The difficulties that captive insurance companies have had in finding suitable first-line insurance companies at cost-effective rates are one of the biggest challenges facing the captive insurance industry today.