Certain types of esoteric liability coverages may not be conveniently available in Canada. Canadian laws also may prevent certain types of liability coverages from being offered domestically. Insurers also may lack adequate data to price the products correctly. When the marketplace cannot provide coverage, a captive can be formed to cover these liabilities. Reducing costs and avoiding the margin built into the insurance premiums to cover commissions or overhead is another advantage.
Captives allow many Canadian companies to reduce expenditures while investing capital internally.
This will ultimately increase shareholder value. Canadian captives also can help to avoid group participation. When risk mitigation is essential and an insurance company must participate in a pool with others who have poor experience but similar risk profiles, a captive becomes a tool of subsidization. In more developed, mature and fragmented insurance markets, such as Canada, captives can help the parent company efficiently manage capital. Typically, minimum-capital requirements in captive domiciles are either nominal or currently nonexistent.