Captive Insurance
A captive insurance company (“captive”) is an insurance company established to insure risks which emanate from its parent and other affiliates of the corporate group. They can also be used to insure the risks of their parent group’s consumer. The use of a captive is a risk management technique through which the captive finances its retained losses in a formal structure.
The use of a captive insurance company offers its parent a number of advantages, such as:
(a) Cost. The premiums charged by the captive are generally lower than those charged by commercial insurers.
(b) Flexibility. In a “soft” market, a captive can reinsure a portion of its risk at reduced rates. This will permit the captive to build a reserve base. In a “hard” market, the captive can retain a greater portion of the risk and maintain insurance coverage for its parent.
(c) Claims Management. The process of managing claims can be prescribed by management.
(d) Claims Experience Benefits. A captive will generally retain a portion of the overall risk and reinsure the remainder. If there is better than expected claims experience the captive retains the excess of the net premiums. If the claims experience is worse than expected the reinsurance obtained by the captive can be tailored to minimise the group’s exposure to risk.
** Captive structures include:**
(a) Single Parent Captive. The captive insures the risk of its parent company and other affiliated companies.
(b) Group Captive. The captive insures the common risk of a group of companies in the same industry.
(c) Association Captive. Similar to a group captive, this captive insures the risk of members of associations such as ship owners, dentists, lawyers, doctors and tradesmen.
(d) Agency Captive. The captive is created by an insurance company to reinsure the insurance company’s insurance portfolio.
(e) Segregated Cell Captive. The captive is divided into “cells” and each cell reinsures the risk of the shareholder of the cell. The shareholder of each individual cell is protected from the liabilities incurred by other cells in the captive.
A captive insurance company is not taxed on its profits and gains during its first 15 years of existence and is taxed at a rate of 2% on the first US$125,000 of its profits. There is no withholding tax payable on dividends, interest and certain other returns.
Captive insurance companies are subject to an initial licence fee of US$10,000 and the licence must be renewed annually for the same fee.