Captive Insurance Companies as an Alternate Risk Financing Technique

Many corporations that we work with have questions regarding the potential value of creating a “Captive” insurer arrangement.

A Captive is a licensed insurance company utilized to insure a wide range of risks depending on business needs.  Many businesses begin with coverages such as the deductible or self-insured portions of general liability, auto, casualty, property and workers compensation losses, but often expand coverages to include unique risks such as management liability, environmental liability, terrorism, cyber, professional liability, and extended warranty claims.  Risks can be first-party or third-party, and companies can be creative in how they utilize their Captive programs.

Companies that consider the use of a Captive have a few choices: a Single-Parent Captive that have only one corporate owner, or joining with a Group Captive that has multiple corporate owners.

Risk managers are empowered by more relevant data than ever before.  These data points, combined with the growing availability of alternative risk solutions, can, and often does result, in more robust risk finance strategies- often making these entities far more resilient.  But first, risk managers and the c-suite officers must understand how to use alternative risk financing techniques, the most common being Captives.  Captives offer benefits such as stabilization of costs, ability to earn investment income, access to coverage not available in the market and improved claims handling and risk control, potential significant tax advantages, among others.  At Insurex, when we counsel an organization on this topic, we focus on several initial considerations:

• Identify opportunities and risks associated with Captive formation.

• Analyze various alternative risk financing solutions that support short and long term corporate goals.

• Develop a Captive feasibility study with the assistance of internal and external resources.

• Analyze risk retention variables.

• Coordinate Captive management with other enterprise initiatives to reduce the organization’s overall cost of risk.

In its simplest form, a Captive is a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies).  Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured.  They are typically established to meet the unique risk-management needs of the owners or members.  Additionally, they provide potentially significant tax advantages, which can prove integral to longevity and company profitability.

Captive insurance companies have been in existence for over 100 years.  Over the past 30 years, there has been significant growth in the Captive market.  Today, there are over 7,000 Captives globally compared to roughly 1,000 in 1980 according to AM Best Captive Center.  Captives can be domiciled and licensed in a wide number of jurisdictions, both in the U.S. and offshore.  The Captive's primary jurisdiction is known as its “domicile.”  The number of Captive domiciles is growing and remains competitive, with many members of the Fortune 1000 having such entities.  More than 70 jurisdictions have some form of Captive legislation.  In terms of number of Captives, Bermuda is the largest single jurisdiction followed by the Cayman Islands.  In Europe, Guernsey, Luxemburg and Ireland are the market leaders.  In the U.S., Vermont is the largest domicile and is considered a leader in Captive legislation.

Talk with us if we can assist.  The advantages of going captive include:

• Broad coverage tailored to meet your needs. 

• Stability in pricing and availability with reduced operating costs. 

• Improved cash flow. 

• Increased control, coverage and capacity

• Investment income to fund losses.

• Direct access to wholesale reinsurance markets.

• Funding and underwriting flexibility.

• Greater control over claims.

• Smaller deductibles for operating units.

• Additional negotiating leverage with underwriters, providing alternatives to the costly practice of trading dollars with underwriters in the working layers of risk.

• Incentives for loss control.

• Potential significant tax advantages

Not a source of legal or tax advice.