A captive insurance company is owned and controlled by its insured's.
- Its primary purpose is to insure the risks of its owners
- It acts like a traditional insurer in may respects
- It issues policies, buys reinsurance, pays claims and invests premiums
Types of Captives
Single parent captive
- Wholly owned subsidiary that insures the risks of its parents or affiliates
Group captive
- Jointly owned by a number of companies that have similar insurance needs
Agency captive
- Owned by an insurance agency or brokerage company. Reinsures a portion of agency’s clients’ risks
Rent-a-Captive
- Provides access to established captive facilities including capital and insurance license
Segregated Accounts / Protected Cell Captive
- Derivation of rent-a-captive allowing participant to insure its own risks in an individual cell, segregated from the liabilities of other cells
Potential Benefits of Captive Insurance Programs
Increased awareness of risk management
- Greater understanding of the need to manage the corporation’s risk in a co-ordinated and proactive manner
Reduction or stabilization of the cost of insurance
- When substantial volatility in premiums occurs a captive may be able to smooth premium levels over a given period
Lower expenses
- A captive can operate at reduced expenses compared with a traditional insurer
Credit for good claims experience
- Premium can be set based on the claims experience of the parent rather than by reference to the performance of a broad industry group
Increased cash flow and investment income
- Investment income on premium and reserves will be for the benefit of the captive, not a third party insurer
- Captive can benefit parent by agreeing to flexible premium payments and by paying claims promptly
Insuring the uninsurable
- Certain types of risk are either very difficult to insure in the traditional market or command unreasonably high premiums
Direct access to the reinsurance market
- Captives can benefit from direct access to reinsurers, which may have lower expense ratios than direct insurers
- Reinsurers may also quote lower premiums to a captive because the parent has a financial involvement in the risk
Premium Deductibility
- Premium payable to captive is deductible from income for purposes of calculating tax payable
- Tax regulations do not allow for deductions for reserves held for payment of future losses
Additional advantages
- Creation of new profit centre
- Less onerous regulatory environment
- Additional capacity
- Possible additional taxation advantages
Feasibility Study
- Detailed cost / benefit analysis
- Reviews the capital requirements, structure, ownership, management, and the financial objectives of the captive
- What is the optimum risk retention structure for the captive and how much retained risk is the company willing to accept?
- Compares expected future losses to surplus in captive to determine whether the captive exercise makes sense or is the company risking a lot for a little
Jurisdiction
- There are established captive industries in many offshore insurance centers such as Bermuda, Cayman Islands and Barbados
- Many U.S. states have begun to establish onshore captive industries. These include Vermont, South Carolina and Hawaii
- Most provide similar benefits, however, Canadian companies insuring non-Canadian risk may obtain more favourable tax treatment in Barbados
HKMB Assurex Captives
- Heterogeneous captive (“AG One”) and construction captive (“AGCR”)
- Formed by Assurex Global Partners to compete in alternative risk market
- Segregated accounts captives
