Castletown Insurance - Captive Insurance Companies

CAPTIVES: IN BRIEF

Status:

Licensed insurer owned by/ covering parent.

Suitable for:

Companies with larger insurance programmes: minimum premium £500,000.

Benefits:

- Capture underwriting profits
- Smoothing premium cycles
- Underwrite risks not easily insurable
- Create contingency reserves
- Fiscal benefits
- Access to the reinsurance market
- Risk management focus

Cost:

Approximately £10,000 to form, £50,000 per annum to run.

Capitalisation, solvency:

Class 12 (Captive licence: covering parent, related business)
-	Minimum capital: £50K
-	Minimum solvency margin: £50k, plus 10% up to first £2m premium, 5% of premium thereafter

Class 11 (Reinsurance company-non life business)
-	Minimum capital: £100K
-	Minimum solvency margin: £100K

FEATURES AND BENEFITS OF A CAPTIVE INSURANCE COMPANY

A captive insurance company may generally be described as an insurance company formed by an industrial or commercial company primarily to insure some or all of the risks of its parent or associated companies. Like any other company, the captive insurance company will be capitalised, have Directors and will employ managers who carry out the day to day running of the company. The company must also be authorised to carry on insurance business.

Benefits of a captive

Each captive is unique and each one is formed for different reasons. Highlighted below are some of the most important benefits.

1.	Capture underwriting profits. Conventional insurers aim to make an underwriting profit: it makes sense for insured companies to retain the underwriting profits made in the years of normal losses themselves by writing the insurance in their captive, and protecting the captive against a catastrophe through reinsurance. By using a captive, a company will not be penalised if the industry pricing is influenced by the poor claims record of others in the industry. Where companies have a better than average loss experience, their premium costs will reflect this.
2.	Smoothing the cost of premiums. It is well known that premiums in the conventional market follow a cyclical pattern leading to budgeting and cashflow problems. A captive allows companies to decide at what level they wish to participate in the conventional insurance market and hence what level of premium to pay for risk transfer.
3.	Niche products underwriting. The conventional market may not meet the needs of the parent company: often the underwriter will not or cannot offer the cover required. In this case the captive may be able to offer the cover, buying reinsurance to protect itself against a catastrophe.
4.	Contingency reserves. These can be built up in a captive which will protect it against a higher than expected level of claims, or offer cover to the parent company against losses that may be low frequency but high severity, or offer cover that would not otherwise be available in the market. Being located in a low tax jurisdiction, certain tax benefits may be achieved.
5.	Access to the reinsurance market. Often known as the "wholesale market", this market offers cover to insurance companies and as such tends to have lower overheads, such as marketing related costs. As a result it can often offer lower terms than the conventional market, and will sometimes pay commissions back to a captive for producing the business.
6.	Risk Management Focus. Information focus, risk retention, relating operating companies premiums to their own loss experience: the captive may have a role in these and other areas.
7.	Taxation. Captives can, and most do, take up the option of being granted tax exempt status or being zero rated.

When should a client consider a captive?

It is difficult to define simply when a company should consider forming a captive, as every company and their needs are unique. In general terms companies which benefit from captives tend to have common features. These include companies with:

	profitable net premium income exceeding £500,000;
	a Risk Management focus;
	loss history which is better than others in the same industry;
	low frequency, high severity risks and/or those that are suitable for excess of loss reinsurance, (lower levels of risk could be retained in the captive);
	understanding and support from senior management

MANAGEMENT SERVICES

Castletown Insurance Services Limited is able to offer a comprehensive service or a number of selected services, tailored to meet clients' specific requirements, and may include the following:

Preparation of Business Plan

One of the earliest considerations of clients. We will work directly with the client or with their intermediaries to ascertain whether a captive is feasible and whether it will meet the client's requirements. We can quickly prepare business plans with a variety of parameters for the client's consideration. If the programme is considered feasible, we will prepare the final business plan, ready for application for a licence. We do not normally charge for this service unless a full feasibility study report is required.

Incorporation and Licensing

Once the programme has been structured and agreed upon, we will arrange formation of the company and undertake the role of obtaining a licence for the new Captive. This will include assembling all the information, completing and submitting the required forms to the Insurance & Pensions Authority and Isle of Man Companies Registry.

Directors and Company Secretary

We would recommend that the majority of Directors are based on the Isle of Man. Individuals can be provided by Castletown Insurance Services Limited with the required experience. If preferred, we can recommend a number of individuals with relevant experience that would provide excellent local non-executive Directors.

Underwriting and Claims Services

This is at the heart of our role, that of running insurance companies, and is why our team boasts a number of Chartered Insurers (ACIIs and an FCII).

The following tasks are undertaken within this role:

	review of underwriting proposals, risk assessment, premium calculations;
	issue of cover notes, debit/ credit notes;
	arrangement and service of reinsurance programmes;
	preparation/ review of policy documentation;
	premium settlement;
	preparation/review of reinsurance cover notes, agreements and addenda;
	claims handling and settlement: individual or by bordereau;
	statistical analysis of underwriting results;
	liaison with Clients, Risk Managers, brokers, claims adjusters, consultants and advisers.

Accounting

Strong expertise in this area is vital to the management of captives. We have a strong, qualified Accounting Team, with good IT systems that offer the required expertise in the following areas:

	preparation of management accounts as required by captive's board;
	quarterly statutory accounts for submission to the Insurance Supervisor;
	annual financial statements and supplementary information;
	accounts and/ or reports to the Parent Company, tailored to suit each individual clients' requirements;
	arranging investment of funds within the mandate laid down by the company's Board. If a fund manager is employed, liaising with the fund manager selected by the Board;
	liaison with the clients auditors and/ or advisers.

Board Meetings

These are the forum for the Board to discuss the results of the Captive, consider renewal and make decisions as to the running of the Company. The Managers will arrange these meetings, prepare and issue a Board Pack with all the information that the Directors require to evaluate the Company's progress, host Board Meetings and prepare and circulate the minutes of meetings.

We pay particular attention to these important meetings and ensure the timely distribution of all documentation to ensure the directors have sufficient time to prepare for the meeting. Meetings are held in our high quality board room.

Corporate Secretarial

We ensure a client meets its statutory obligations and complete statutory returns in a timely manner. We keep up-to-date company registers with complete records of the activities of the company and minutes of meetings.

Development Proposals

Working directly with clients, their risk manager or broker, we aim to offer value-added service to clients, bringing to bear experience we have gained, to enhance the effectiveness of the Captive.

COSTS OF A CAPTIVE

Set up Costs

Set up fee	£5,000
Incorporation	£750	(Includes duty on first £2,000 of capital)
Audit of business plan	£1,175	(£1,000 plus VAT)
One off authorisation fee	£1,000
Government Duty	1.4%	(of authorised capital in excess of first £2,000. Maximum duty payable £5,000)

Annual Costs

Licence/tax exemption	£3,250
Non Executive Directors	£3,000	(Each)
Audit	£5,287	(Estimate £4,500 plus VAT)
Management fee	£35,000	(Normal minimum, dependent on work)
Sundry	£500

Management fees (which are exempt from VAT) are determined in accordance with the volume of transactions, number of classes of business underwritten in the Captive, accounting requirements and number of meetings anticipated for the year.

Fees can be structured as a flat charge for the year, payable quarterly in advance; alternatively a minimum/ maximum fee can be agreed with quarterly adjustments made on a time spent basis.

Minimum Capital Requirements/ Solvency Margin

Captive	(Class 12)	£50,000
Reinsurer	(Class 11)	£100,000

The Captive must maintain assets that exceed a defined solvency margin at all times: for a Reinsurer this is £100,000; for a Captive: £50,000 plus 10% of net premium written up to £2million, 5% of net premium in excess of £2million.

Example

A Captive with paid up share capital of £150,000 and net premium Income of £900,000 will have a minimum solvency requirement of £140,000 (£50,000 plus 10% of £900,000). With a moderate work-load the cost will be approximately as follows:

Set up Costs:
Set up fee	£5,000
Incorporation	£750
Audit of business plan	£1,175
One off authorisation fee	£1,000
Government Duty	£2,072 ______
Total	£9,997

Annual Costs:
Licence/tax exemption	£3,250
2 Non Executive Directors	£6,000
Audit	£5,287
Management fee	£35,000
Sundry	£500 ______
Total	£50,037

STEPS IN FORMING A CAPTIVE INSURANCE COMPANY

As most companies considering forming a captive insurance company have developed Risk Management disciplines, a captive project usually involves the risk manager and the company's broker or insurance adviser. The initiative is often driven by a combination of the Risk Manager and Finance Director as a captive may have a significant bearing on the balance sheet, in protecting its assets and minimising the effects using insurance for adverse events.

We are able to work with brokers and advisers, as well as directly with client companies if required. We have a wealth of experience in structuring captive programmes and are able to produce feasibility studies and business plans to illustrate the financial performance of a captive within selected parameters and expected level of premium and claims. We do not usually charge for this service unless a client wants to commission a comprehensive report.

Also see:
	Contingency Policies/Rent-A-Captive