Captive Insurance Companies

Captives are Insurance Companies established with the specific objective of financing risks originating from the Parent Organization or Groups of Organizations, its owners, and sometimes affiliated firms. Earnings from underwriting profits and investment income are retained by the Parent Organization. These earnings would otherwise be retained by a traditional Insurance Carrier. Utilizing a Captive is a "Risk Management" technique whereby an Organization, or Organizations, form an Insurance Company.

Captives are widely used both domestically and abroad. A.M. Best, one of the world's most respected information sources on the Insurance Industry, estimates that there are over 5000 Captives Worldwide. While statistics do not exist for the size of the Captive Insurance Market, it is estimated by many professionals to be larger than the Traditional Insurance Market.

Domicile of Captives - Captives can be licensed in many jurisdictions with the "primary jurisdiction" known as the Captive's "Domicile". Many of the Captive insurers make their home "Offshore". For a variety of reasons these locations include: Anguilla, British Virgin Islands,The Caymon Islands, Barbados, Belize, Bermuda, Luxenbourg, Malta, and others. One of the reasons for site selection is that some jurisdictions allow Captives to be set-up with less "initial capitalization" and lower "reserves". While some jurisdictions offered lower tax rates on investment and and underwriting income, the U.S. has eliminated many of these advantages for U.S. Organizations that own offshore Captives.

Uses of Captives - Captives are established to insure a wide variety of risks. Captive Insurance for H&L and P&C include: Commercial Vehicle and Auto Liability; Directors and Officers Liability; Employee Benefits such as Long Term Care Insurance (LTCI) and Supplemental Life Insurance; Product Liability; Professional Liability; Property; and Workers' Compensation.

Captives have become an important component of risk management and a risk financing strategy of the parent Organizations. The following make Captives attractive to Organizations:
      1). Costly and increasing premium costs in almost every line of coverage
      2). Difficulties in insuring certain types of fortuitous risk
      3). Differential coverage standards in various parts of the world
      4). Rating structures which reflect market trends rather than individual loss
           experience
      5). Insufficient credit capacity for deductibles and/or loss control efforts

Regulation of Captives - Regulation of Captives differs widely depending whether they are domestic or international. Offshore domiciles are monitored by the Organization for Economic Cooperation and Development ("OCED"), the International Monetary Fund ("IMF"), and other international monitoring organizations in order to ensure that the domicile meets international standards, ensuring compliance with financial controls to prevent money laundering, tax fraud, etc. In less regulated jurisdictions, the absence of strict compliance with these international standards can be a concern. In general, only a bona fide regulatory jurisdiction should be considered. There are Federal and State-by-State regulations as well as tax issues - including income, excise, and premium taxes - which should be taken into consideration.

Considerations when Creating a Captive - Creating a Captive is a substantial undertaking, and no business should contemplate use of this type of risk management program unless it is willing to make a long-term commitment of 3 - 5 years to the planning. A team of seasoned professionals is necessary to design, implement, and then continuously monitor your Captive Insurance Company.

Forming and operating a Captive is challenging and requires expertise in many specialized professions. These include: risk managers; corporate finance, insurance and tax lawyers, accountants and auditors, reinsurance specialists, and actuaries. Coordinating the activities of these many persons calls for a effective Captive Management Team.