One of the hottest topic in board rooms today is whether or not to climb onto the
captive insurance bandwagon, or if they are already participating, whether they should
really venture into underwriting.
Captives now number over 10,000. Many of these captives are located in Bermuda,
Bahamas, British Virgin Islands, Cayman Islands, Guernsey, and the Netherlands Antilles.
Several billion dollars in premiums flowed through Bermuda based companies last year
alone. Of the U.S. Fortune 500 companies, over half have captives.
What is a Captive Insurance Company?
A captive insurance company is a company whose charter permits it to offer insurance to
its parent or sister subsidiaries in return for premiums. Usually, this company is located
offshore for tax reasons.
Why Start One?
In almost every case, captives are started because of a general dissatisfaction with
existing insurance coverage or costs. The advantages are in these areas: Insurance,
Commercial, Financial, and Tax.
A captive can provide insurance for risks which may not be normally insurable For
example, there is limited insurance available in the areas of strikes, product recall,
patent suits, etc. Loss experience is based on the company's experience rather than being
averaged with others that have less stringent controls and more prone to claims. Reduction
of insurance costs is available as there is no sales force or overhead to pay for, no
claims administration group, etc. Insurance company direct costs run around 2050% compared
to 5% for captives. Insurance income is earned on premiums, i.e., ceding commissions from
reinsurance companies, inure to the captive rather than an outside insurance company.
The prime advantage is the ability to earn interest on capital and reserves, thus
turning a cost center into a profit one. The development of insurance to enhance product
acceptability is available prenatal planning insurance is a good example of this. The
ability to be more flexible in the settlement of claims is possible; i.e., perhaps a
company would wish to make a commercial judgment on a claim where an advisor or
wholesaler might be held to be more/less liable under ordinary insurance proceedings. The
ability to benefit from situations where evidence of insurance is more acceptable than a
company guarantee or promise to pay; i.e., sick leave insurance for employees where a
union wants a policy of state benefits.
Captives provide the opportunity of converting specific reserves to insurance costs at
the parent level thus converting posttax reserves to pretax expenses. Examples reserves
against product reliability or subsidiary debt, guarantees, etc. The ability to lower
costs derived from the realistic evaluation of exposure vis-à-vis existing premium/risk
expenses is available. The ability to transfer normally nonconvertible funds for exchange
control purposes to a subsidiary as a genuine risk financing measure is generally
available. The improvement of cash flow is available using a captive in case of claims,
the captive has use of funds until the claim is settled; in the case of reinsurance,
premiums are paid quarterly in arrears instead of yearly in advance for normal insurance.
Premium expense is generally deductible at the parent level, but income earned on
investment at the captive level is not taxable. Special rules apply for U.S. and Canadian
companies. The lack of regulation of investments at the captive level mean funds could,
with prudence, be used to finance the needs of sister companies.
Premiums paid to a captive are generally deductible at the parent level (U.S. and
Canadian companies require special planning, but remember the tax advantages are merely a
bonus to the captive idea). Capital, reserves, and premiums are not taxed in most offshore
locations. The success of a captive relies on good management not good luck. Top
management must understand the long-term commitment to captive insurance. Bad risk
assessment or a series of unlucky occurrences can cost a captive dearly in the early
years. Annual premium costs alone are not criteria for establishing a captive. More
importantly, a company needs a good spread of risks and low maximum loss potential.
Captive reserves may be invested in the money markets. Loans may be made to fund
capital for the captive. Loans may be made to provide premiums which must be paid in
advance. Loans for claims payments may be made where assets are temporarily not available
in the captive or the captive is involved in legal action. New banking relationships are
available with the captive. Access to reinsurance companies as possible clients. Added
service may be offered to existing clients. Possible foreign exchange dealings are
feasible; e.g., premiums, claims, or reinsurance. Security custodianship of investment is
What OffshoreSimple Inc can provide?
Correspondents in all major international financial centers including the Bahamas,
Bermuda, Cayman Islands, Netherland Antilles, etc. as well as relationships in lesser
known jurisdictions like the St. Vincent, Turks & Caicos Islands, Uruguay, etc.
Experienced management and accounting staff for all records keeping aspects.
Investment management capabilities on an international basis.
Consulting on captive formation and structure visavis parent.
Access to risk managers and consultants where necessary.