The emergence of captive insurers can be attributed to the growing instability and unpredictability of modern economic life. In today's ever-changing economic environment, the supply and premium rates of the traditional insurance market are extremely unstable and subject to great uncertainty. Managers of commercial companies hope to find a new way to control those unpredictable risks. As a way of pooling emergency reserves, captive insurance can usually take advantage of more favorable tax conditions and has become a driving force in the development of innovative risk financing today.

The term “zibao” originates from the English word “Captive,” and in China it is also translated as “zhuanshu” (exclusive). In October 2006, the International Association of Insurance Supervisors (IAIS), in its “Paper on Issues Relating to the Regulation of Captive Insurance Companies,” defined a captive as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, the purpose of which is to provide insurance or reinsurance cover for the risks of the entity or entities to which it belongs, or for entities connected to those entities, with only a small part of its risk exposure related to providing insurance or reinsurance cover to other parties.”

The Captive Insurance Companies Association (CICA) of the United States defines a captive insurer as a special risk transfer vehicle distinct from traditional insurance companies and reinsurance companies.

H. Felix Kloman's “Risk Management Reports” defines a captive insurer as an insurance company that is owned by its parent company, primarily underwrites the business of the parent company—in other words, an insurance company whose insured is its parent company.

In summary, a captive insurer is first of all an insurance company approved by the insurance regulatory authority of a given country and permitted to engage in commercial insurance and reinsurance business. It is invested in by a parent company that is not itself engaged in the insurance business, and its main purpose is to underwrite insurance for its owner and the owner's related enterprises or to provide risk financing. It has the following characteristics:

(1) In terms of corporate governance structure, the parent company is the sole shareholder or the overwhelming majority shareholder, holding ownership of the company.

(2) The clients served by a pure captive insurer are the parent company, its subsidiaries, and affiliated enterprises;

(3) it undertakes the parent company's traditional commercial insurance business, that is, applying the law of large numbers in insurance to help the enterprise diversify high-frequency risks;

(4) it participates in the parent company's risk management and provides financing for certain low-frequency but high-severity risks that cannot be insured in the traditional insurance market; and it uses non-traditional insurance instruments to innovate risk management.

(5) Since many captive insurers are registered in offshore financial centers, in actual operation a captive insurance company often performs the function of a reinsurance company: the parent company's insurance is first underwritten by a local fronting company and then ceded to the captive insurer in the form of reinsurance.

Captive insurers share similarities with insurance forms such as mutual insurance companies, insurance mutual-aid organizations, and intra-group self-insurance, in that their owners are all the insured. However, there are essential differences among them: the owner of a captive insurer (the insured) contributes capital and bears risk, conducting risk financing, and directly intervenes in day-to-day operations, influencing and directing the captive insurer's underwriting, claims, investment, and other operating activities.