CAPTIVE INSURANCE
Forming a Captive
 
FEATURES
& benefits
 
COSTS
of a Captive
 
 
 
CAPTIVE INSURANCE
Features & Benefits

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.

Features of a captive

   

Status:

Licensed insurer owned by the parent.

   

Suitable for:

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

   

Benefits:

  • Capture underwriting profits
    		•
  • Smoothing the cost of premiums
    		•
  • Underwrite risks not easily insurable (Niche Products)
    		•
  • Create contingency reserves
    		•
  • Access to the reinsurance market
    		•
  • Risk management focus
    		•
  • Fiscal and taxation benefits
    		•
       

    Cost:

    Approximately £10,000 to form, £60,000 per annum to run.

       

    Capitalisation, solvency:

  • Class 12 (Captive licence: covering parent, related business)
    • Minimum capital: £50,000
    Minimum solvency margin: £50,000, plus 10% up to first £2m of net premium, 5% of net premium thereafter

  • Class 11  (Reinsurance licence non-life business)
    		•
    Minimum capital: £100,000

    Minimum solvency margin: £100,000

     

    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.  This can lead 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 premiums than the conventional market, and will sometimes pay commissions 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 are taxed at a zero rate of Income/Profits tax.  This enables reserves to be built up more quickly.


    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 spend 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.
       

     
         

     
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