Which of the following best describes a captive insurer?

A captive insurer is primarily designed to serve the insurance needs of its parent company or companies. This means that the main function of a captive insurer is to provide coverage for the specific risks faced by its owners, allowing businesses to have more control over their insurance costs and claims process. Captive insurers are often used by larger organizations to create a tailor-made insurance solution that fits their unique risk profile, thus gaining advantages like reduced premiums and greater flexibility in policy terms.

The other descriptors do not accurately capture the nature of a captive insurer. For example, suggesting that it only insures commercial risks overlooks the broader potential for captives to be involved in various personal and business risks as required by the parent. Similarly, identifying a captive as an external provider misconstrues its function, as a captive is wholly owned by its parent company and does not serve the general insurance market. Lastly, the idea that a captive insurer exclusively operates internationally restricts its operational scope; while captives can certainly function globally, they may also exclusively serve domestic risks. Thus, the definition of a captive insurer focuses on its role in supporting its parent’s insurance requirements, making the correct answer appropriate in this context.