Imagine the dilemma facing Frederic Mylett Reiss, a property insurance engineer and insurance broker hired by Youngstown Sheet and Tube steel company to reduce their insurance costs in 1955. At the time, the company was reeling from labor strife and skyrocketing insurance premiums.

Back then, the insurance market for large factories and steel mills was dominated by just a few insurance companies, and they were demanding ever higher premiums. Rather than pay the hefty rates being commanded by the big insurers, Reiss sought a creative solution for his client.

Reiss knew that 500 years earlier British ship owners met in Lloyd’s coffee shop in London to document their names and the value of their cargo, and agree to share the risks associated with their operations.

Even before that, Italian ship owners were entering into risk-sharing arrangements in seaport cities. In the 19th century, with fire periodically ravaging their operations and ballooning their insurance rates, New England textile manufacturers entered into a cooperative arrangement to share the risks.

The concept of self-insurance was known. Reiss was about to take it to the next level.

Reiss went about establishing a new insurance company in Ohio, Steel Insurance Company of America, owned and operated by Youngstown Sheet and Tube. Steel Insurance would issue an insurance policy to its parent company.

But Youngstown Sheet and Tube couldn’t take the full risk of insuring itself. So Steel Insurance sold some of the risk to Lloyd’s of London, the very company founded half a millennium before in the coffee shop. Lloyd’s would provide “reinsurance” to Steel Insurance, essentially insuring the insurer against catastrophic claims. Steel Insurance would continue to process and pay on smaller claims made against Youngstown Sheet and Tube.

With that innovation, Frederic Reiss became the father of captive insurance. The myriad financial benefits of captive insurance companies were apparent immediately. Companies establishing captives had more opportunity for a return on investment and underwriting, and gave captive owners direct access to reinsurers.

Where did the name “captive insurance” come from?

Youngstown Sheet and Tube owned coke and iron mines that supplied the key raw materials for its steel mills, guaranteeing they could always be supplied regardless of external market forces. Company executives called these subsidiaries “captive mines.” Reiss adopted the nomenclature from the company, labeling the new insurance subsidiary a “captive insurance” carrier.

That wasn’t Reiss’s only innovation in captive insurance. In 1962 he created the first captive insurance management company and headquartered it in Bermuda, where the regulations, at the time, were more accommodating. Many captive insurance companies are headquartered in Bermuda, among other offshore domiciles, though most U.S. states have now enacted legislation that authorize captive insurance companies to be formed there.