Captive Life Insurance: What You Need To Know

A captive insurance company is a wholly-owned subsidiary insurer formed to provide risk mitigation services for its parent company or related entities. In other words, it's a form of self-insurance where a company creates a subsidiary insurer to provide insurance coverage for itself. Captives are typically established to meet the unique risk-management needs of their owners, and they also provide potentially significant tax advantages. Captive insurance companies have been in existence for over 100 years, and today, there are over 7,000 captives globally.

Captive insurance companies are a form of self-insurance

Captive insurance is utilized by insureds that choose to put their own capital at risk by creating their own insurance company and working outside of the commercial insurance marketplace to achieve their risk financing objectives. Any insured who purchases captive insurance must be willing and able to invest their own resources. The insured in a captive insurance company not only has ownership in and control of the company but also benefits from its profitability.

Captive insurance companies are often formed to supplement commercial insurance, allowing the parent company to keep the money it would otherwise spend on additional insurance premiums. They are typically established to meet the unique risk-management needs of the owners or members and provide potentially significant tax advantages, which can prove integral to longevity and company profitability. Captives are formed to cover a wide range of risks; practically every risk underwritten by a commercial insurer can be provided by a captive.

A captive insurance company may provide part of its coverage through reinsurance strategies. Reinsurance is when an insurer transfers all or a portion of its risk to another insurance company in exchange for a premium. For example, a captive may only cover losses up to a certain amount per occurrence and use reinsurance to cover losses that exceed that amount.

There are several types of captive insurance companies, but the two main ways a captive can be structured are as a pure captive or a group captive. A pure captive insurance company only insures the risks of its parent company and its affiliates. It is often operated by a single owner. A group captive insurance company is created by multiple companies or organizations to provide insurance coverage to member companies. It can be homogeneous, where the member companies are all in the same industry, or heterogeneous, where members are associated with different industries.

They are wholly-owned subsidiary insurers

A captive insurance company is a wholly-owned subsidiary insurer formed to provide risk mitigation services for its parent company or related entities. They are typically established to meet the unique risk-management needs of the owners or members. The parent company owns 100% of the common stock in a wholly-owned subsidiary insurer, leaving no minority shareholders. Despite this, the subsidiary remains an independent legal entity with its own management structure, corporate culture, and clients.

Wholly-owned subsidiary insurers allow the parent company to diversify its product lines, streamline management, and possibly reduce risk. They can also help the parent company maintain operations in diverse geographic areas, markets, or related industries, thus hedging against changes in the market or geopolitical and trade practices.

The formation of a captive insurance company can provide significant tax advantages for the parent company. The parent company pays insurance premiums to the captive insurance company and seeks to deduct these premiums in its home country, which is often a high-tax jurisdiction. Captive insurance companies can also provide cost savings, greater control over coverage and claims, and underwriting profits.

However, there are some potential drawbacks to captive insurance companies, including overhead expenses, compliance issues, and the potential to be underinsured. Corporations that form captive insurance companies generally rely on traditional insurers to insure against some risks and may use reinsurance companies to distribute some of the risk.

They provide risk mitigation services for parent companies

Captive insurance companies are a form of self-insurance, where a company creates a subsidiary insurer to provide insurance coverage for itself and mitigate risks for its parent company or related entities. They are wholly-owned subsidiaries that provide risk mitigation services for their parent company and any related entities.

A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insured. Its primary purpose is to insure the risks of its owners, and its insured benefit from the captive insurer's underwriting profits. The insured in a captive insurance company not only has ownership in and control of the company but also benefits from its profitability.

Captive insurance companies are often formed to supplement commercial insurance, allowing the parent company to keep the money it would otherwise spend on additional insurance premiums. They can be helpful when the commercial insurance market is unable or unwilling to provide coverage for certain risks.

Captive insurance companies can provide coverage for a wide range of risks, depending on the business needs. They can start with coverage for the deductible or self-insured portions of general liability, auto, casualty, property, and workers' compensation losses. They can also expand coverage to include unique risks such as management liability, environmental liability, terrorism, cyber, professional liability, and extended warranty claims.

By utilizing a captive insurance company, businesses can benefit from greater flexibility in retaining risk and insurance/reinsurance options to manage challenging insurance markets. Captives also offer the ability to tailor coverage for hard-to-insure or emerging risks, apply alternative strategies to deal with insurance market cycles, provide financial incentives for loss control, offer flexibility in managing risk, offer creative insurance solutions, allocate costs to business units, and consolidate risk management.

Captives can be domiciled in the US or offshore

Captives can be domiciled and licensed in a wide number of jurisdictions, both in the US and offshore. The captive's primary jurisdiction is known as its "domicile". There are more than 70 jurisdictions with some form of captive legislation.

In the US, Vermont is the largest domicile and is considered a leader in captive legislation. Other US domiciles include Missouri, North Carolina, South Carolina, Tennessee, Utah, and Delaware.

The largest single jurisdiction for captives outside the US is Bermuda, followed by the Cayman Islands. Other offshore domiciles include the British Virgin Islands, Barbados, and the Turks & Caicos Islands.

When choosing a domicile, it is important to conduct a detailed feasibility study that includes an analysis of several critical aspects, such as pro forma financial projections, the business case for captive formation, and an overall business plan for captive operations. The domicile selection is an extremely important aspect of this feasibility study.

Onshore domiciles refer to jurisdictions within the United States that have enacted special legislation to encourage captive formations. Offshore domiciles refer to jurisdictions outside the United States that have similar legislation. Historically, most captive insurance companies were formed offshore due to the lack of legislation in US domiciles. However, over the years, more than 30 US states have passed specific captive regulations, levelling the playing field between onshore and offshore domiciles in terms of tax advantages.

Some specific situations require onshore domiciles, such as risk retention groups (RRGs) and the usage of the federal terrorism backstop. Additionally, to gain approval from the Department of Labor to use a captive for employee benefits, the parent company must have a US-domiciled captive or use a US branch of an offshore captive.

There are two main types: pure captives and group captives

Captive insurance companies are wholly-owned subsidiaries created to insure their parent company or related entities. They are a form of self-insurance, where the insurer is owned by the insured. Captives are typically established to meet the unique risk-management needs of their owners. They also provide tax advantages and allow for greater control over losses, reinsurance, and costs.

There are two main types of captives: pure captives and group captives. Pure captives are owned and operated by a single owner and only insure the risks of their parent company and affiliated companies. On the other hand, group captives are owned by multiple companies or organisations and provide insurance coverage to member companies.

Pure captives are often established by a single parent company to insure itself and its affiliates. They are commonly utilised when the parent company cannot find suitable insurance from outside firms to cover specific business risks. Pure captives allow the parent company to retain greater control over losses, reinsurance, and costs. Additionally, the parent company can benefit from tax deductions on the premiums paid to the captive insurer.

Group captives, on the other hand, are formed by multiple companies or organisations with similar or diverse risk profiles. Homogeneous group captives consist of member companies from the same industry, while heterogeneous group captives are made up of members from different industries. By joining together, the companies in a group captive gain buying power and benefit from risk management efficiencies. This type of captive is often utilised when traditional commercial insurance is insufficient or too expensive.

Both pure and group captives offer increased control and flexibility in managing risks and insurance coverage. They allow companies to tailor their insurance programmes to meet their specific needs, providing coverage for unique or emerging risks that may not be available in the commercial insurance market.

Frequently asked questions