What is a Captive?
A captive is a special purpose insurance company that insures the risk of its owners and sometimes related or affiliated third parties.
The history of captives is that their use dates back to the early 1960’s. The captive became more prevalent during periods of insurance crisis – premium pricing volatility, increase in policy exclusions, higher deductible amounts and rise in coverage / definition restrictions.
Today, according to Business Insurance, there are more than 5,200 captive insurance companies worldwide.
Captive Managers have sufficient resources to perform insurance, accounting, underwriting, and claims functions.
This can involve the following:
- Annual reports and filings for regulators
- Bind coverage and issue insurance or reinsurance contracts
- Perform banking and investment functions
- Rate and underwrite risk exposure
- Issue policies
- Allocate premiums, losses and dividends as needed
- Adjust claims
VNAS has the resources to assist the captive owners and entity to ensure planning, compliance and reporting are handled.
- The owners of the captive can be its policyholders or insured parties or other 3rd parties.
- The owners enhance control over management, underwriting, claims, investments, etc.
- Overall decisions regarding captive operation rest in the hands of the Board of Directors elected by the captive owners.
Captive as Supplement to Commercial Insurance
- You want to control your destiny.
- You know your risks better than any insurance company underwriter.
- You do not want to be rated based on others and industry losses.
- Certain aspects of “off the shelf” insurance programs do not suit a company’s specific circumstances.
- Coverage can be tailored to meet the specific needs of the policyholder.
- Underwriting flexibility to provide coverage where it is unavailable or overpriced in the commercial marketplace.
- Premiums are based on the loss experience of the captive, not on the income and expense needs of an insurance company.
- Premium funding flexibility based on actuarial loss projections via confidence intervals.
- Underwriting profit and investment income belongs to the captive, not the insurance company.
- Accumulated surplus can be used to reduce future premiums or be returned to the shareholders as dividends.
- More incentives for safety programs and loss control.
- Greater control over claim handling.
- Opportunity for premium/loss reserve tax deductibility.
- Insurance company accounting treatment – IBNR.
- Potential for lower overhead costs so a larger percentage of premiums can be used for claim payments or dividends.
- Direct access to the reinsurance marketplace.
- Independence from the conventional insurance marketplace.
- Flexibility – endorsements, cancellations, premiums.
- Potential for tax advantages.
Who Should Consider a Captive?
- Significant uninsured or under-insured risks and exposures.
- Desire to retain potential underwriting profit.
- Track record of low loss ratios/safety/loss control.
- Disproportionate premium to policy limits.
- Ability to capitalize.
VNAS’ staff is educated and familiar with domicile selection. VNAS’ staff will assist captive owners to understand the aspects of selecting the proper domicile for the captive including:
- Registration and incorporation expenses
- Premium taxes
- Investment restrictions
- Resident Agent requirements
- Reporting requirements