Advantages of a Captive

Properly used, captive insurance companies can bring many advantages which vary considerably depending on the circumstances. Those that apply in most cases are:

  • Cash Flow- Cash flow is enhanced as an organization can time premium payments to fit in with its own cash flow situation.
  • Direct Access to Reinsurance - Captive insurance allows organizations direct access to the reinsurance market. Because commercial insurers work on higher expense ratios than a captive, reinsurance can be obtained at a lower cost without paying commissions and fees.
  • Capacity -   Through direct access to the reinsurance market; over time, successful underwriting creates surplus in the captive, enabling the parent to increase retentions lowering its dependency on reinsurance.
  • Tailor-Made Policies - The flexibility to develop tailored coverage for individual business units within the group provides increased risk management control. Insurance coverage of multinationals or associations may be designed to meet the precise requirements of the shareholders.
  • Insuring the Uninsurable - Enjoy the benefit of purchasing particular coverage's that are unavailable or unacceptably priced in the commercial insurance market.

    Few restrictions are placed on captives formed in offshore jurisdictions, therefore, they can write policies which the conventional market is unable to offer. This would include such risks as new or potentially hazardous products, hazardous waste, nuclear risks, environmental pollution, losses due to strikes, confiscation of assets, devaluation, war risks, product recall and guarantees.
  • Stability/Continuity -  As the organization designs its own program, it also avoids the impact of insurance industry coverage and pricing fluctuations.

    Historically, the insurance industry has been subject to considerable cyclical changes in which excess capacity leads to increased competition, resulting in decreased premium rates and poor underwriting results. This, in turn, causes a market reaction resulting in dramatic increases in premium rates and restriction on the availability of some types of coverage.

    In some cases, premium rates may be set unrealistically high as the commercial insurance sector attempts to recover some of its losses from the previous cycle of depressed rates. For example, in the 1980s, liabilities associated with medical malpractice claims increased the overall cost of insurance in the industry, which penalized unrelated parties.
  • Investment Income -  The captive earns investment income on premiums and capital during the period over which losses are paid out. All the investment income accrues to the benefit of the captive and its owners.
  • Economics - Where an organization over a period of time consistently pays premium which exceeds the amount recovered through insured losses, it is obviously beneficial to be able to capture the profit which has previously been earned by commercial insurers.
  • Greater Control Over Claims - Captive insurance, essentially being self-insured, provides incentives for owners to reduce or eliminate the potential for claims through proactive risk control and claims management techniques.
  • Insurance Cost Reduction - Although captives will incur certain operating expenses, overall insurance costs are drastically reduced. Reductions result from the elimination of the profit element built into premium charged by commercial insurers and reduction of expenses through the avoidance of high sales, marketing and administration costs of commercial insurers.
  • Tax Minimization and Deferral - Depending on the tax laws where it's domiciled, a captive insurance company can offer tax savings. Many of the main offshore domiciles offer an additional advantage. There are no income taxes, corporation taxes or premium taxes, and the government offers a twenty year renewable guarantee against the imposition of any tax to be levied against profits, income or gains.
  • Reduction of government regulations and restrictions - The insurance industry is heavily regulated in all developed economies, with minimum capital and surplus requirements, solvency margins, specific ratios of premiums written to net assets (and requirements) and, in some cases, restrictions on investments. In addition, many multi national corporations experience difficulties in the international transfer of funds through dividend payments because of national exchange control restrictions. An offshore location for a captive insurance or reinsurance company can, if properly established within the legal requirements of the domicile, provide a less onerous regulatory environment, widen investment opportunities and facilitate legitimate international movement of funds, all of which may be of vital importance to the commercial interests of the multi national corporation.