Objective: demonstrate knowledge in captive insurers, inrelation to enterprise risk management.
You are the risk manager of for Paymore ShoeSource, a large,publicly traded, and expensive shoe store chain. Your boss tellsyou that you that Paymore is planning to set up a broad insurancecaptive. Overhearing the conversation, a coworker who is notfamiliar with captives interrupts the conversation with a number ofquestions. Please answer the following questions for thecoworker.
Generally, why would a large company such as Paymore (that isassumed to be risk neutral) purchase insurance?
What is an insurance captive?
Why might the company want to insure through a captive ratherthan through a traditional insurer? List two reasons.
a)
b)
What is the structure of a “broad” captive? Please use a diagramto illustrate your answer.
Based on the structure just described, does a broad captiverepresent a contract of insurance defined by the IRS? Discuss therequirements of an insurance contract and argue whether or not abroad captive meets these requirements.
