Captive Life Insurance: A Smart Business Strategy?

Captive insurance is an alternative to traditional insurance where a company or group of companies provide coverage for their own risks by forming their own licensed insurance company, instead of buying insurance from a third-party. Captive insurance companies are typically established to meet the unique risk-management needs of their owners or members. They are subject to state regulatory requirements, including financial reporting, capital and solvency support, reserve adequacy, and an annual actuarial opinion.

Captive insurance companies are owned by their insureds

Captive insurance companies are a form of self-insurance. They are wholly owned and controlled by their insureds, and their primary purpose is to insure the risks of their owners. In other words, the insureds are the owners and beneficiaries of the captive insurance company. This is in contrast to a mutual insurance company, where the policyholders are the owners but do not actively participate in running the company.

Captive insurance companies are often formed when the insureds choose to put their own capital at risk by creating their own insurance company, working outside of the commercial insurance marketplace, to achieve their risk financing objectives. This allows them to have more control over their insurance program, including broader coverage, stabilized pricing and availability of insurance, and improved cash flow.

There are two main types of captive insurance companies: pure captives and sponsored captives. Pure captives are owned by their insureds, while sponsored captives are owned and controlled by unrelated parties. Pure captives can be further divided into single-parent captives, which have only one owner, and group captives, which have multiple owners.

The formation of captive insurance companies offers several benefits, including lower insurance costs, tax advantages, underwriting profits, and greater control over coverage and claims decisions. Additionally, captives can provide coverage for risks that commercial insurance companies are unable or unwilling to insure. However, there are also drawbacks, such as overhead expenses, compliance issues, and the potential to be underinsured.

Captive insurance companies have been in existence for over 100 years, with the term "captive insurance" first coined by Frederic Reiss in 1955. Today, captive insurance is a popular choice for many businesses, with over 7,000 captives globally and approximately 90% of Fortune 500 companies having captive subsidiaries.

Captives are a form of self-insurance

Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the unique risk-management needs of their owners or members. Captives are formed to cover a wide range of risks; almost every risk underwritten by a commercial insurer can be provided by a captive.

Captives are often established because insurance in the commercial market is prohibitively expensive, poorly matched to the insured's needs, or unavailable altogether. A captive insurer can successfully provide coverage for difficult risks that are tailored to fit the exact needs of the insured(s) as long as the captive operates within sound underwriting, actuarial, and regulatory guidelines.

Captive insurance companies are subject to state regulatory requirements

For example, in Arizona, captive insurance companies are prohibited from providing certain types of insurance such as life and disability insurance. They are also not allowed to provide workers' compensation or employee liability insurance, except in specific circumstances. On the other hand, Vermont, the largest domicile for captive insurance companies in the US, requires a minimum combined capital and surplus total of $250,000 for pure captives.

The requirements and regulations for captive insurance companies can also vary depending on the structure of the company. For instance, sponsored captive insurance companies, which are owned and controlled by parties unrelated to the insured, may have different requirements compared to pure captive insurance companies, which are owned by their insureds.

It is important to note that captive insurance companies have been in existence for over 100 years and can be found in various jurisdictions worldwide, including the US, Bermuda, the Cayman Islands, Europe, and more. The laws and regulations governing captive insurance companies in these jurisdictions can differ significantly, so it is essential to refer to the specific state or jurisdiction for detailed information on their regulatory requirements.

Overall, captive insurance companies are subject to state regulatory requirements, but the specific rules and laws can vary depending on the state, the type of captive insurance company, and the structure of the company. As such, it is important for captive insurance companies to understand and comply with the specific regulations that apply to their particular situation.

Captives can be domiciled and licensed in a number of jurisdictions

Captive insurance companies have existed for over 100 years, with the first captive insurance company established in Bermuda in 1962. Since then, the captive market has grown significantly, with over 7,000 captives globally.

Captives can be domiciled and licensed in a wide number of jurisdictions, both in the U.S. and offshore. The captive's primary jurisdiction, or its place of permanent residence, is known as its "domicile". This term is used to refer to the state, territory, or country that licenses a captive insurance company and has primary regulatory oversight over that captive insurer.

There are several factors to consider when choosing a domicile, as the domicile will determine many of the parameters that will guide the success of the company and increase its value to its parent. Firstly, the regulatory environment of a domicile sets the tone for other considerations such as licensing, ongoing operations, and taxation. Different domiciles have varying captive laws and regulatory climates, with some being more captive-friendly than others. It is important to understand the regulatory requirements and jurisdiction-specific details of each potential domicile.

Another key consideration is capitalization, which refers to the minimum initial amount of money required to commence operations. This requirement varies widely from jurisdiction to jurisdiction, with some locales allowing part of the capitalization to be in the form of letters of credit.

Additionally, prospective captive owners should familiarize themselves with the licensing process of each domicile, as the license application, processing, and business plan review procedures differ. Some domiciles rely on a panel of industry experts or paid actuarial consultants to review the initial business plan, while others use a combination of these methods.

The local captive community and onshore/offshore implications are also important factors to consider when choosing a domicile. A thriving local captive community indicates a supportive environment for the captive industry, while the decision to domicile a captive onshore or offshore will have various impacts and implications.

Overall, the right captive domicile will assist in maintaining a balance between regulation and flexibility, applying an appropriate measure of regulation to the nature, scale, and complexity of the risk profile for the success of the captive.

Captive insurance companies have been in existence for over 100 years

In the 1800s, New England textile manufacturers formed a group to share risks due to high fire insurance rates. In the early 1900s, the Episcopal Church formed the Church Insurance Company to cover risks associated with member churches. After World War II, the use of captives expanded with the industrial boom.

The term "captive insurance" was coined in 1955 by Frederic Reiss, a property-protection engineer in Youngstown, Ohio. Reiss is often referred to as the "father of captive insurance" or the "great white father" of the captive movement. He established the first captive insurance company in Bermuda in 1962, marking the beginning of the modern captive industry. Bermuda became the leading domicile for captives, followed by the Cayman Islands, which emerged as a popular jurisdiction for healthcare-related captives.

By the end of the 1960s, there were approximately 100 captive insurance companies globally. Over the past few decades, the captive market has grown significantly, with over 7,000 captives worldwide today. Captive insurance companies are now established by a diverse range of entities, from major multinational corporations to non-profit organizations, to meet their unique risk management needs and gain tax advantages.

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