What is a captive insurance program?
Defining Captive Insurance. A captive is a licensed insurance company fully owned and controlled by its insureds – a type of “self-insurance.” Instead of paying to use a commercial insurer’s money, the owner invests their own capital and resources, assuming a portion of the risk.
What are the benefits of a captive insurance company?
Advantages of Captive Insurance
- Coverage tailored to meet your needs.
- Reduced operating costs.
- Improved cash flow.
- Increased coverage and capacity.
- Investment income to fund losses.
- Direct access to wholesale reinsurance markets.
- Funding and underwriting flexibility.
- Greater control over claims.
What is an example of a captive insurer?
For example, British Petroleum wisely set up a captive insurance company (Jupiter Insurance Ltd.) to provide environmental insurance to its operating units, and the moneys from its captive were used to fund in substantial part the Gulf cleanup.
What is a captive Programme?
The primary purpose of a captive is to reduce the company’s total cost of risk. Captives are often used as an integral part of a company’s international insurance program, but can also cover local risks or be used in a purely domestic structure.
Is captive insurance a good idea?
For many businesses, captive insurance is a no-brainer. In the right situations, it can reduce costs, insulate against insurance premium hikes, boost revenue, provide broader coverage and more efficiently finance risk. It really does sound too good to be true.
What is the difference between captive insurance and self-insurance?
The main difference to note between self-insurance and captive insurance is how each is set up. With self-insurance, the owner sets up a type of savings account where they save money to use when claims arise. Captive insurance, on the other hand, is more formal because it is a small insurance company.
Is captive insurance risky?
Captive insurance is a legitimate tax structure for small-business owners. Premiums paid to a captive insurer can be tax deductible if the arrangement meets certain risk-distribution standards. Thus, the business gets a current year write-off even though losses may never occur.
How do captives make money?
Earn investment income: Captives can earn investment income on their loss and unearned premium reserves. A guaranteed cost policy purchased from a commercial insurer would not provide this additional income to the insured.
Why do companies form captives?
The Purpose of a Captive
To be very clear, the purpose of an insurance company and, therefore, a captive is to pay losses (your own losses) and to afford you (the owner) more control over your risk and any losses that do occur. Put another way, captives are an alternative risk transfer mechanism used to finance risk.
How much does it cost to start a captive insurance company?
Pure captives in the US generally require between $125,000 and $250,000 of initial start up capital.
What are the two major types of captive insurance companies?
Captive insurance companies can take a number of different forms. However, the most common types are single-parent captives and group captives. A single-parent captive, also known as a pure captive, is owned and controlled by one organization and formed as a subsidiary of that organization.
How are captive insurance companies structured?
The group or association captive is a structure in which multiple businesses join together either through a formal association or an informal relationship to use a captive to obtain coverage or limits otherwise unavailable. This form has become a source of revenues and industry cohesion for many trade groups.
Why is it called captive insurance?
A “captive insurer” is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.
What does captive company mean?
A captive unit is a business unit of a company functioning offshore as an entity of its own while retaining the work and close operational tie ups within the parent company.
Is captive insurance an asset?
While many directors focus on the liability side of the captive insurer’s balance sheet, the asset side is of equal or greater importance. Captive insurance assets, predominantly in the investment portfolio, provide a substantial portion of the free cash flow necessary to meet the claims obligations of the company.
Can a captive insurance company borrow money?
The captive doesn’t restrict the premiums that it receives to resolving claims, but instead applies those to the benefit of the business, the business owner, or somebody else close to the business owner. For example, the captive may loan money back to the insured business.
Do captive insurance companies pay taxes?
Internal Revenue Code Section 831(b) provides that captive insurance companies are taxed only on their investment income, and do not pay income taxes on the premiums they collect, providing premiums to the captive do not exceed $2.2 million per year.
How long does it take to set up a captive insurance company?
You will also need to provide the domicile with evidence that you have the necessary capital required for the captive in a form suitable to the regulator. Approvals typically can take 90 days or more, although domiciles are becoming better at streamlining this process.
How are captives regulated?
Captives are regulated in a manner different from traditional insurers. A jurisdiction which is determined to establish itself as a captive domicile must pass enabling legislation to recognize that a captive is self-financing of risk.
How does a single parent captive work?
A Single-Parent Captive or Pure Captive is owned and controlled by one parent and insures the risks of the parent company and its affiliates. The captive operates as an insurer for its parent company or group, underwriting all or a portion of the risks of its owners.
Which classes of insurance are generally better candidates for captive insurance?
Typically, the best candidate for a captive program is a company with high insurance premiums, low claim frequency, steady cash flow and palatable risk.
What is a captive insurance manager?
Captive managers are companies or persons that are authorised by the Insurance Supervisory Authority to undertake the administration and execution of the managerial function, including the administration of contracts of (re) insurance for a captive.
What is a cell captive insurer?
Cell Captive — a sponsored captive or rent-a-captive, which maintains underwriting accounts separately for each participant. May be called protected cell captive (PCC) or segregated cell insurer. If the cells are legally segregated, it may be used to securitize risk.
What is a single cell captive?
Cell Captives are entities consisting of a core and an indefinite number of cell entities which are kept legally separate from each other. Each cell has dedicated assets and liabilities ascribed to it, and the assets of an individual cell cannot be used to meet the liabilities of any other cell.
Why are captives offshore?
Choosing to domicile your captive offshore can bring greater regulatory flexibility; offshore captives usually allow lower minimum capital requirements and may not require regulatory examinations. Some jurisdictions have developed an environment that is particularly supportive of certain types of captive.