Captive Insurance Company

Foreword:
Before starting on this subject, the reader should be notified that captive insurance is such a large and fairly complex topic. We have therefore chosen to highlight some of the most important areas, in order to provide you with the most relevant information. Either way Captive insurance could become a valuable and interesting option for the reader.

Captive Insurance Companies

Purpose of a Captive Insurance Company
A captive insurance company is a corporate entity, usually a private insurance company, which is created and controlled by either, a parent company, a professional association or a group of businesses. The purpose of the captive insurance company will be to provide insurance for that parent company, professional association or group of businesses against certain risks.

The risks which will be insured will usually relate to the business of the parent company etc. and the captive will usually accept the insurance from the parent or association and then pass some of the risk to a re-insurer. This is because captives are usually only authorised to deal with small amounts of risk, whereas re-insurers are able to spread the risks which they accept.

Captives can also be used to provide general risk insurance for their parents and can be used to cover insurance needs such as those required in the travel business, to cover against bad debts, and to provide professional indemnity cover.

Offshore Bases
Not all offshore centres are suitable bases from which to establish and provide captive insurance company services. Generally, it is only those centres which have introduced specific insurance legislation and regulating which should be considered (e.g. Bermuda, the Cayman Islands, Dublin, Guernsey, the Isle of Man, and Luxemburg).

Possible Benefits of an Offshore Captive Insurance Company
There are a variety of reasons why an offshore captive insurance company might be chosen although this is what the reader most commonly will be quoted.

Cost savings
A captive can reduce insurance expenditure as this method of cover is often cheaper to arrange than commercial insurance. This is because all of the group's insurance can be arranged by the one entity which is usually more cost-effective that having each part of the group making their own arrangements. Greater economies of scale are therefore possible.

In addition, this type of cover provides access to the wholesale insurance market and as a result there are no marketing or sales fees to pay, which are often built into the premiums paid under conventional insurance arrangements.

Premiums which are also due to the captive can be settled at a time and in a manner which best suits the parent company or group as a whole

It is also more economical to hold the cash within the group which would otherwise have been paid to cover commercial insurance premiums.

Finally, some risks are also very expensive to cover under conventional insurance policies and captives provide a relatively inexpensive alternative.

Centralisation of risk management
As the captive will usually be part of an organisation or group, it provides the opportunity to centralise risk management and for the organisation to review or formulate its central policy or risk.

To provide cover against risks
Captives can bus used to provide cover which is not currently in place (as an alternative to conventional insurance arrangements). They can also be used to provide cover which conventional policies will not cover (such as high risk activities or natural disasters, strikes, war, product recall or pollution).

Cash flow
Those captives which reinsure a portion of the risk usually do not have t o pay a premium to the reinsurance agent in advance as it would generally only be required to pay on an 'earned' basis. This enables the captive to retain the use of the cash it has received in respect to its premium income which aids its cash flow situation. Such monies can also be invested which should increase its returns. In addition, the payment of premiums can also be delayed by the parent so as to further improve its cash flow situation

Tailoring of insurance cover
A captive insurance company can enable an organisation to arrange and provide cover which it tailored to its particular needs.

Clarity of legislation
It is generally true to say that the insurance legislation which most offshore centres have introduced is clear and concise. There will be less onerous reporting and regulatory requirements than those which are applied to onshore insurance companies enabling the managers to conduct their business affairs in a much more flexible manner.

Taxation
This possible advantage has been left until last as taxation should not in itself be a reason for deciding to establish a captive insurance company. Other consolidations (as mentioned before) should be the driving forces in determining whether a company should create a captive insurance operation.

However, there can be taxation benefits where are associated with such an operation as the reader soon will find out.

     a) The insurance premiums paid by the parent to its offshore captive could be tax deductible in the parent's 'home' country:

     b) A captive would not normally be assessed to tax in the offshore centre on the premiums received from the parent company, nor would it be liable to tax on any capital gains which are realised on the sale of assets purchased with the premium income:

     c) Surplus income and capital gains built up by a captive could be returned to the parent company at a time which would be tax advantageous to the parent company.

Possible disadvantages if an Offshore Captive Cost
Although a captive can save costs in the long-term it can be an expensive option in the short-term as it would not only have to be funded by the parent company but it would also usually have to be capitalised, as well as also have to be fully resourced.

Risk
Although it is possible to limit the risk to the captive insurance company by passing some risk to the re-insurer, it is still exposed to claims which may arise, and as a result, the captive should try to limit risks to those where a good claims record has been previously achieved and is contemplated.

Fiscal restrains
Some onshore centres have legislation in place which is designed to restrict the taxation benefits offered by captives on offshore centres. In some countries, for example, local taxation is levied in some insurance premiums which are paid to overseas insurance companies which do not have a place of business in that country.

Offshore regulation
Generally, the regulation of offshore captive insurance companies is not as onerous as the regulation of onshore insurance business. This can be and advantage as it enables the captive to be more flexible in terms of its business undertakings, gut it can also be a major problem if the parent or grout is too flexible in its approach to the risks which it wants the captive to take on board.

Managed captives
There are two alternatives to setting up a captive insurance operation in an offshore centre. The group or parent could either set up its own operation in an offshore centre or it could instead decide to have its operation managed by an insurance broker which is resident in an offshore centre.

Having a 'real' presence can be expensive and can also create administration problems, such as how to move experienced staff into the offshore centre to service the proposed business. It is therefore common practice for captives to be managed in an offshore centre by a local agent.

The agent appointed to manage the captive operation must be carefully chosen and although there is a wide choice in some centres, in others here are only a few service providers who one would consider as suitable. It is essential that, as with other types of agent, the manager of the captive is an experienced and reputable service provider with the resources to handle both the type and volume of work which is envisaged.

Cost can often be reduced by using a manager as the agent will already have the structure, premises, equipment, expertise, experience and staff in place to handle the business, thus saving the capital costs which would have been incurred if a captive operation had been started from scratch.

Regulation and Supervision of Offshore Captives
A growing number of offshore centres have introduced legislation which governs the provision of insurance-related services and such legislation will generally cover the creation and administration of captives.

Each centre will have their own particular requirements (Victrola Independent kindly recommends the reader to seek more advice with regards to any specific centre) but generally the following areas will usually be covered in the captive insurance regulations.

• An application will have to be made to the local regulatory authority to create a captive insurance company.

• The company wishing to conduct captive business must meet certain capital requirements (subject to the centre in question)

• A business pal must be prepared, containing plans of project, cash flow as well as details of owners.

• the directors got to prove that the are fit and proper' to act, and that they are properly educated to take office

• Regular reports and accounts may have to be submitted to the regulatory authority

• Annual accounts would need to be prepared

• Certain liquidity requirements will usually have to be met.

• A licence will usually be issued to those service providers or companies who are authorised to conduct captive insurance business.