What is Captive Insurance?

That’s a great question, and if you’re not in the business, you may not understand it. Captive insurance allows you to form your own regulated insurance company turning an expense into a profit center for your business. Captives vary in structure and can be formed by one company, a single-parent captive, or with a group of other like-minded businesses. In the simplest of terms, you finance your risk in a new and different way. 

Now, you may be asking, “But, what about my business? Am I the right fit for a captive?”

That’s where Global Captive Management Ltd. (GCM) comes in.

A captive insurance solution is appropriate for an organisation willing to retain and insure their own risk while having adequate premium levels to support the operations and expenses of a captive. At GCM, we know a captive is not the right fit for all clients, and we are always prepared to provide trustworthy guidance to prospective clients in assessing what, if any, type of captive is the best fit for them.

Benefits of Setting Up Captive Insurance

Is setting up a captive beneficial? We can help you decide! 

Having decades of experience and knowledge of the captive insurance market in addition to our in-house tax expertise, GCM is able to analyse the benefits your organisation would gain from setting up a captive.  

Over the years, we found seven universal benefits.

Increased Coverage Options

An insurance captive may provide coverage where the commercial market is unable or unwilling to provide coverage for certain risks.

Access to the Reinsurance Market

Captive insurance provides direct access to reinsurance markets where the captive can secure competitive bids from a broader market, increasing the opportunity of negotiating price and contract terms.

Lower Insurance Costs

Who doesn’t love to save money? 

An insurance captive helps you lower your insurance costs — especially when comparing it to traditional insurance programs. Captives: 

  • Lower transaction costs and administration expenses 
  • Reduce the net cost of insurance through the retention of underwriting risk and potential profit 
  • Retain investment income earned on assets held for future losses, which is a benefit normally enjoyed by commercial carriers collecting your insurance premiums

Diversification into a Profit Center

Apart from writing risks or related parties, some captives may insure the risks of third parties.

Cash Flow

Using an insurance captive supports effective cash management through being able to control the flow of funds to and from the captive. This leads to a more efficient use of capital.

Potential Tax Benefits

Ordinarily, uninsured losses, , deductibles, and self-insured retentions are deductible when paid. A properly structured captive insurance program can accelerate those deductions so they may become deductible when accrued rather than paid. Ian Bridges, GCM resident tax specialist, provides valuable insight into the tax issues for many captive structures.

Risk Management Incentives

By paying for your own losses, the captive directly incentivizes the improvement of safety and loss control programs versus a traditional guaranteed cost program. An effective risk management program could result in recognizable savings for the captive. A captive provides the ability to retain greater control of risk, thus enabling a strong handling of claims and ability to mitigate losses and expenses.

Through an independently managed captive program, an owner/insured can retain service providers, such as fronting carriers, reinsurers, claims specialists, loss control experts, and managed care firms of its own choice — ones that are best suited to meet your specific needs.

An insurance captive also allows the unbundling of the claim handling costs, with the owner/insured having control over the management of claims and the third-party administrator contracts.

Professionals talking about captive insurance

Types of Insurance Captives

A captive insurance company originally insured only the risks of its owner or parent company and, hence, was “captive” to it as it was its only source of business. The term has since become used for any insurance company set up in a captive domicile and not regulated as a traditional commercial insurance company.

Single-Parent Captive

A single-parent captive is owned and controlled by a single-parent organisation, company, partnership, trust, or individual. The captive insures the owner and other related entities. A single-parent captive is the simplest and most common structure typically used by hospitals (or other not-for-profit organisations) or large and mid-size privately owned for-profit organisations where ownership consolidates to one or a small number of individuals. 

Group Captive

A group captive is a popular captive solution for a group of unrelated individuals or organisations which come together to form a captive. This solution is very popular with small and mid-size organisations whose individual premiums can’t support the ongoing operational costs, but when pooled with other premiums, can provide both economies of scale and the potential for greater risk distribution to spread risk amongst all the captive’s owners. The risk in a group captive is generally homogenous, though, not necessarily.

Association Captive

An association captive is similar to a group captive except it’s sponsored or owned by an association itself versus individual association members. For example: An association representing local grocery store owners could own a captive, which would be considered an association captive. Alternatively, the members of the association could directly own part of a group captive without involving the entire association. Given the inherent nature of an association, the risk in the captive is generally homogenous. 

Agency Captive

An agency captive is owned by an insurance agency. The agency may place both its own risk and risk of the agency’s clients into the captive. GCM sees agency captives as a creative opportunity for agencies to offer more creative alternative risk structures to their clients.

Segregated Portfolio Company

A segregated portfolio company (SPC) is a legal structure in the Cayman Islands and many domiciles and offers similar segregated cell, incorporated cell, etc. legislation. The benefit of an SPC is the ability to silo different insurance programs in different cells such that the assets and liabilities of one program are legally separate from the assets of another program. 

An agency captive can be set up as an SPC, where each individual client is placed into its own cell. A hospital captive can be formed as an SPC, where a not-for-profit business and a for-profit business are each placed into separate cells. As a result, the risks are not comingled.

Portfolio Insurance Company

A portfolio insurance company (PIC) is also a legal structure in the Cayman Islands similar to an SPC. In fact, it is the cell of an SPC which can incorporate a PIC. The cell holds the voting shares of the PIC, and the program participants own non-voting shares with the right to the profits of the PIC. The incorporation of the PIC is what sets this structure apart from the unincorporated cell in an SPC. PICs still allow for the same legal separation of assets and liabilities from other cells, but PICs go one step further by having its own distinct Board of Directors. 

The fact that PICs are incorporated allows for contracting between PICs or the Core since each PIC is a separate exempt limited company under Cayman Islands law. While PICs are generally a little more costly than a cell, require a few more weeks to form and register with CIMA, and may require more capital, they have the benefits of additional governance and contracting flexibility. PICs, again by nature of already being incorporated, are also easier to spin off as separate standalone entities. Read more about the benefits of PICs.