Additional Information on Captives
In order to understand where a captive insurer would sit within the overall corporate risk management process it is necessary to review the risk control measures available.
Generally speaking a risk may be reduced, fitting a sprinkler system in a building, transferred, to an insurer for an agreed premium, or self retained. The motivation for retention will have a number of facets:
- there may be an economic advantage in retaining the funds that would otherwise be paid immediately to an insurer;
- the financial ability of the company to bear the risk;
- the loss characteristics of the exposure;
- the desire of management to undertake the additional risk and administrative responsibilities.
If the motivation exists a decision must be made as to how the costs are to be borne. The available options are:
- pay losses as they arise from cash resources;
- create an internal reserve fund to which funds are allocated in anticipation of a loss;
- create an external reserve fund with a captive insurer.
Thus the establishment of a captive insurance company is in effect the formalisation of an organisation’s self-funding provisions.
Having considered the positioning within the overall risk management process and observed the insurance market conditions that will give rise to the consideration of the feasibility of establishment of a captive insurance company it is necessary to review the perceived “benefits”.
The ”benefits” are generally accepted to be:
Premium savings
Use of a captive means that an organisation is able to avoid contributing to the non-risk associated cost of conventional insurance premiums.
Selection of risk
Risks can be retained by the captive or transferred to insurers. Those risks with a relatively predictable loss experience are obvious candidates for retention. As are those risks considered inappropriate for direct insurance by virtue of exposure or price.
Risk control
The impact of losses from retained risks is felt immediately.
Improvement or deterioration in the parent’s loss experience will be reflected in the underwriting results of the captive.
Price stabilisation
The insurance market is cyclical in nature and therefore prone to fluctuations in available capacity. This adversely affects an organisations ability to forecast short or long term pricing. A captive can assist in “smoothing” the impact of such fluctuations
Access to reinsurance markets
Reinsurers are able to provide capacity at a much lower cost than direct insurers. As a consequence they are able to relate more directly premium levels to actual loss experience. They also tend to be more flexible in their consideration of exposures.
Development as a profit centre
The successful operation of a captive adds value to the parent organisation as its pure risk costs may be significantly reduced through improved loss control and therefore risk financing cost.
Taxation
There are few tax benefits other than deductibility on premiums paid to a captive. Against this it should be appreciated that Insurance Premium Tax is payable on UK risk exposures.
Offshore location
Given that the tax benefits of locating a captive offshore have all but disappeared, the major benefits result from cost savings, reduced capital requirements and flexible regulatory regimes.
WHO SHOULD CONSIDER A CAPTIVE?
There is no definitive answer. Each organisation should view its risk control measures in isolation but certain factors would clearly make the assessment of feasibility more straightforward. These factors include:
- Premium income exceeding £500,000 per annum.
- A good loss history with predictable loss patterns.
- An embedded risk management ethos.
- The support of the organisations senior management.
- The ability to provide the captive with capital of £100,000.
TYPES OF CAPTIVE STRUCTURE
The majority of captives are wholly owned subsidiaries of their parent organisation (pure captives). Other captives include:
Rent-a-captive
A rent-a-captive is an independently owned and capitalised insurance company, normally located offshore which will issue insurance policies for both conventional and unconventional risks. As a concept it offers a viable alternative to a pure captive
A rent-a-captive would not normally seek to retain risk for its own account. Thus, liability to any one client is limited to the funds accumulated on its account. Broadly, such funds will consist of premiums paid, investment income and reinsurance recoveries less the cost of reinsurance purchased, claims, management and facility fees.
Rent-a-captives have the particular advantage of providing low cost access to reinsurance markets without the need to form a pure captive.
The rent-a-captive differs from a pure captive in as much that:
- no capital is required from the insured;
- there are no incorporation costs;
- the rent-a-captive owns legal title to the insured’s fund;
- administration costs are lower;
- the fund cannot be consolidated into insured’s accounts.
The Protected Cell Company (PCC)
Developed in Guernsey in the late 1990’s the PCC extends the concept of rent-a-captive through the segregation and statutory protection of individual cellular assets.
A PCC:
- is a single legal entity;
- provides, for each cell, legal segregation and protection of assets and liabilities;
- may create its own core shares and cell shares, providing two classes of assets, core (or non-cellular) attributable to the PCC directly and cellular, attributable to each cell;
- can provide an unlimited number of cells;
- offers flexibility in the allocation of capital between the core and individual cells.
It should be noted that creditors of an individual cell of a PCC have no recourse to the assets of another cell, but will have recourse to the core assets. Under a traditional rent-a-captive arrangement a creditor would have recourse to the company’s entire assets.
OUR SERVICES
In order to assist clients to examine viability of a captive programme and the most appropriate captive structure we offer a comprehensive feasibility service, which may include the following:
Insurance audit
This comprises a comprehensive, objective assessment of the adequacy, pricing and structure of the organisations existing risk financing programme. This will enable us establish the feasibility criteria and may suggest the type of captive structure that would be most appropriate to the organisations needs.
Captive feasibility study
This comprises an analysis of the viability and relative costs involved with the establishment of a particular captive programme. If the programme is considered feasible we will assist with local statutory incorporation procedures and prepare and submit the appropriate licence application and business plan.
Captive management
This comprises insurance management, including underwriting and claims administration, financial reporting, secretarial functions and corporate and regulatory compliance.
Our services are fee based and adjusted annually on volume of work.
WHY NORMANDIE RISK MANAGEMENT LIMITED
Our senior personnel have over twenty years’ captive management experience and the company has been a licensed captive manager for over ten years. Captive programmes managed over the period of our establishment have origins in the United Kingdom and continental Europe.
We have designed programmes ranging in diversity from Russian oil and gas companies to those involved in vehicle leasing and building contractors.
WHY GUERNSEY OR JERSEY
Both Islands enjoy a 900-year relationship with the United Kingdom Government as independent crown dependencies. No political parties are represented in either Island ensuring that both Islands benefit from autonomous stable government.
Both Islands are also able to offer captive owners the benefits associated with:
- A first class regulatory regime and legal structure.
- High quality accounting and legal services.
- Excellent banking services provided by banks of international stature.
- Close proximity to the London and European insurance markets
- Good postal and telecommunication services.
- A pleasant environment providing high quality accommodation and restaurant facilities.
- Excellent communication links by sea and air.
- State of the art telecommunication systems.