What is a pure captive?

A pure captive is characterized as a subsidiary company that exclusively provides insurance for its parent company. This type of arrangement allows the parent organization to retain risks and manage insurance costs more effectively. By having its own insurance subsidiary, the parent can tailor coverage to its specific needs, maintain direct control over claims, and potentially achieve cost savings compared to purchasing insurance from traditional insurers.

This setup is typically utilized by larger organizations that seek to have more control over their risk management and insurance processes. It often leads to a better alignment of interests between the insurer and the insured since the captive's primary objective is to cover the risks of its parent firm.

In contrast, other options describe different concepts. For instance, a group of businesses insuring collectively refers to a group captive, where multiple businesses come together to form a single captive insurer. A surplus line insurer involves coverage for risks that are not typically available in the standard insurance market, while a mechanism for transferring risk is a broader term that applies to various forms of insurance and risk management strategies.