What is a Captive?

A Risk Financing Strategy that provides insurance on parts or all of the hazards, risks and liabilities of its parent and/or affiliates.

It can be a valuable risk management tool, which allows businesses to more effectively manage corporate risks of all kinds.

Captives often are set up to insure enterprise risk, risk for which commercial insurance is not available or may be too expensive

In many cases, the owner of the parent company is also the owner of the captive; however, the arrangement may be alternatively structured so the captive is owned directly by the operating company, another person, entity, or trust.

Why form a Captive?

“From a Canadian perspective, captives are both a risk management and tax minimization strategy. If the company has significant, profitable international operations, a captive insurance company is likely worth serious consideration.”

– Gordon Anderson, President, Cidel Investment

  • A captive insurance company may be established to provide unique coverage or coverage not available through commercial property and casualty insurance companies
  • Avoid commercial insurer administrative overheads
  • Insure the uninsurable: obtain coverage otherwise unavailable
  • Control your own program: respond to specific coverage, premium and retention requirements.
  • Tax deductable premiums / Tax deferral or saving
  • Recapture underwriting profits and investment income that would have gone to the commercial markets
  • Centralization & Flexibility: Maintain overall corporate control and design of the insurance program while covering individual operating units of a company with the specific deductibles they require.
  • Access reinsurance markets: Operate on a lower cost structure than direct insurers. Obtain wholesale premium quotes, which primary insurers cannot offer.
  • Create products for the benefit of customers or suppliers (I.e. extended warranties, supply chain risks)

Types of Captives:

  • Single Parent: Wholly owned by a single organization.
  • Group Captives: Owned by multiple companies with similar exposures.  Through formal or informal association these companies band together to attain coverage and limits otherwise unavailable.
  • Sponsored Companies ‘Rent A Captive’: Using another owner’s captive to attain the benefits of captive insurance without direct ownership or group membership. The client company shares the liability.
  • Cell Company: Similar to the sponsored companies, however there is no potential of liability sharing with other members.
  • Association Captives: Owned by members of a common industry or trade association and is designed to insure the risks of that industry among its members
  • Agency Captive: Owned by insurance agents and typically allows the agency to share in the underwriting profits and investment income of its book of business

Domiciles

A captive domicile is a jurisdiction that has specific regulations applying to captive insurance companies.

Factors to look at when selecting a domicile:

  • Regulations – differences in capitalization requirements, premium taxes and investment restrictions amongst a few will play a role when choosing your domicile. Regulations affecting the parent company can also be an issue
  • Tax – premium tax rates differ by domicile, although captive premiums are usually taxed at a much lower level than premium paid to traditional insurers
  • Infrastructure – is there an established infrastructure to support the captive? This applies to the availability of specialist service providers and a regulatory body
  • Logistics – domiciles can tend to be in far away locations so ease of travel and the communications infrastructure are important to consider
  • Perception – some domiciles build a reputation for a particular type of captive or industry so it is essential to pick the domicile that is best for your captive or industry

Top Domiciles:

  1. Bermuda
  2. Cayman Islands
  3. Vermont
  4. Utah
  5. Anguilla

Information sources: