A rental is formed by investors to provide captive services to organizations that want the advantages of a captive but do not or cannot form their own captive. The rental captive typically “rents” its capital and surplus to the policyholder organization for a fee and provides its own administration and services.
In this model, the policyholder business is insured by the captive but usually has much less control over the insurer’s operations than is the case in other more traditional structures. In addition to charging a fee, a rental captive usually requires some form of collateral to protect it from any losses attributable to the renter. Rental captives can be appealing to smaller organizations that cannot afford the start-up costs of forming a captive. Nevertheless, the insured’s lack of control and some unsettled questions regarding tax treatment can be significant disadvantages.