Characteristics of S&P 500 companies with captive insurance subsidiaries

Abstract

This study examines the overall characteristics of large-cap Standard & Poor's (S&P) 500 companies that own captive insurance subsidiaries to manage and fund their retained risks. Understanding why firms choose risk retention over risk transfer is important because it offers an example of how firms make choices for risk management strategies. Using a panel data set from 2000 to 2016, the logistic regression results provide evidence that larger firms are more likely to form a captive insurance company as an alternative method of risk financing. Of relevance to the use of captives is the finding that firms with captives maintain lower cash reserves than their counterparts. This partly reveals the strategic use of capital by the parent company that allocates a portion of internal funds to its captive insurer for operation and coverage. Finally, nonfinancial companies with smaller proportions of intangible assets and capital expenditures are associated with captive utilization. The use of captives is related to the New York Stock Exchange (NYSE)- listed status, particularly for firms that formed captives before 2000.