Understanding Captives
What is A Captive?
A Captive is a Financial Risk Funding Structure - called the most formalized form of self - insurance. It is the assumed part of a risk exposure related to Insurable and Non - Insurable Risks.
Three Cardinal Principles of a Captive
1
Protect the Assets of the owner
2
Insured Control of the Process
3
Make Money - an Under writing profit
How Are They Regulated?
Captives are regulated under the insurance laws of the domicile. On-Shore (U.S. and Off-Shore) Captives must be aligned with the goals of the Owner(s) of the Captive.
Captives Are Not For Everyone
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Captives are not cheap insurance
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Captives must be managed by professionals
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Captives are long term investments (at least five years in duration)
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Captives require capital
What is a Captive?
A Captive is a Financial Risk Funding Structure called the most formalized form of self-insurance. It is the assumed part of a risk exposure related to insurable and non-insurable risks.
-
Protect the assets of the owner
-
Insured control of the process
-
Make money - an underwriting profit
-
Captives are regulated under the insurance laws of the domicile. Captives must be aligned with the goals of the owner(s) of the captive.
-
Captives are not cheap insurance
-
Captives must be managed by professionals
-
Captives are long term investments (at least five years in duration)
-
Captives require capital
-
Difference in Domiciles
U.S. vs Offshore
U.S. Domicile
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Regulated by State Departments of Insurance
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Overseen by rules required by the National Association of Insurance Commissioners (NAIC)
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Higher cost in capital requirements
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Little flexibility in rates, forms, and operations
Offshore Domicile
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The domiciles (preferably UK regulated) require less cost and amount of capital
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Flexible in rates, forms, and filings
-
The offshore domiciles for captives have a lower regulatory burden
Three types of Captives
Single Parent Captive
Insures the exposures of the beneficial owner.
Group Captives
Includes associations, agencies, and similar business entities. All share risk together.
Protected Cell Captives
An insurance structure that securely segregates each cell’s risk.
Depending on the type of business insured and captive form, captives are subject to:
The IRS, ERISA, FinCEN, Departments of Insurance, the Foreign and Corrupt Practices Act, banking regulations, and foreign regulations.
Depending on the type of captive and its unique aspects it may be further subject to mortgage clauses or regulation from the SEC, CMS, DOT, or other U.S. or foreign regulatory requirements.
Things to consider
Captives are unique to each client
Captives are not quoted like commercial insurance
Captives are not easily comparable to commercial insurance. Why? The captive is long term; a captive’s results manifest over time, not annually
Things to know
1
All captives require an annual audit:
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an annual actuarial (review and rate study)
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an annual meeting of the shareholders
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a solvency test
2
All captive owners, shareholders, officers and directors must be formally vetted by or for the domicile which include personal financial statements and a background check to include criminal history.
3
Captives take time to set up before any coverage may be bound. This depends on the size and complexity of what coverage the captive will write for the business. This includes obtaining a fronting carrier, reinsurances or excess, and other requirements from the departments of insurance.
Captive ownership participation
Active participation
Captives require active participation from the ownership to monitor costs and manage the risks associated with their business.
Capitalization
Captives require adequate funding.
Preservation of capital
Ownership must manage their risk.
Loss prevention
An active program designed to stop negative events, such as theft or fire, from occurring.
Risk mitigation
A program designed to reduce the impact of a negative event that has already occurred or is unavoidable.
Funding requirements