What is a Captive?
A captive is a company established to insure or reinsure the risks of its parent or associated third parties. Using a captive insurer is a risk management technique where a business forms its own insurance company subsidiary to finance its retained losses in a formal structure. The term "captive" comes from the fact that the policyholder owns the insurance company i.e. the insurer is captive to the policyholder. If the captive only insures its parent and affiliates it is called a pure captive.
Captives can take a number of forms, including:
* a single parent captive, i.e., a wholly owned subsidiary that insures the risks of is parent or affiliates;
* segregated portfolio, segregated account and protected cell companies;
* a group captive - an insurance company jointly owned by a number of companies that have a common insurance need;
* an association captive – an insurance company owned by a trade, industry or service group for the benefit of its members;
* an agency captive – an insurance company owned by an agency or brokerage firm to reinsure a portion of their clients’ risks; and
* special purpose vehicle – a company used extensively in the past for various financing arrangements but more recently used for catastrophe bond issues.
* risk retention group - an insurance company jointly owned by a number of individuals or companies with a common insurance need authorised by the US Liability Risk Retention Act of 1986 enabling the company to transact business in multiple US jurisdictions.
Onshore & Offshore Captives:
Captives are licensed by many jurisdictions with the primary jurisdiction known as the captive's domicile. In the United States, Vermont is home to more captive insurers than any other U.S. state, with over 800 licensed captive companies as of December 2007. Other U.S. states with significant numbers of captive insurers calling the state home include: Hawaii, South Carolina, Arizona, Montana, Nevada and New York. Many captive insurers make their home "offshore". Bermuda, The Cayman Islands, Guernsey, Luxembourg, Barbados, Malta, Singapore and the British Virgin Islands are a few examples. Bermuda has more captive insurers than any other licensing jurisdiction in the world and is home to captive insurers owned by many large U.S. corporations. The Cayman Islands is the second largest licensing jurisdiction in terms of the number of captives licensed. Vermont is second in terms of insurance company assets but third in terms of captives licensed.
These locations have attractive regulatory structures and some offer favorable tax treatment. Captive owners initially used captives as tax-reduction vehicles but over the years many companies have turned to captives purely because their insurance premiums have risen significantly and they've been able to reduce costs and/or gain greater control by owning their own insurance company. More-and-more companies have established captives to insure a wide variety of risks. Today, virtually every risk underwritten by a commercial insurer is provided for in a subset of captive insurers. Examples include: property, workers' compensation, casualty (general and auto liability, product liability), and employee benefits such as long-term care and supplemental life insurance plans. Loss finance through captives is essentially self-insurance but with the formality a captive offers. In many U.S. licensing jurisdictions, for example, a captive insurer is subject to an annual audit and annual loss certification by a consulting actuary.
Captives also allow businesses access to reinsurance. Reinsurance companies are insurers that operate with minimal staff but provide risk bearing capacity. Captives enable non-insurers the ability to get access to these reinsurance markets that were previously only accessible to commercial insurance companies.
Careers in Captive Insurance
On a day to day basis, the administration and management of a captive will be conducted by a Qualified Accountant (Account Manager or Account executive) who would manage a portfolio of captive insurance companies and be primarily responsible for financial reporting to the shareholders, management of claims, maintenance of corporate records, and compliance with the relevant captive insurance laws. The Account Manager or Account Executive may also be responsible for presenting the financial reports at Board meetings in their capacity as an officer of the board, so excellent communication skills are required. Captive Insurance Account Managers are often (but not always) required to travel within North America to attend board meetings on a quarterly or annual basis.
Uses for Captive Insurance Companies:
The most common use of captive insurance is to cover medical malpractice, due to the high cost of such coverage by traditional insurers. Vehicle insurance, chiefly for physical damage and passenger liability, is also quite common
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. A number of reasons have been put forward as the basis for the growth in the use of captives:
* heavy and increasing premium costs in almost every line of insurance coverage.
* difficulties in obtaining coverage for certain types of risk.
* differences in coverage in various parts of the world.
* inflexible credit rating structures which reflect market trends rather than individual loss experience.
* insufficient credit for deductibles and/or loss control efforts.
Other Advantages of Captives:
In many cases, Captives are used to reduce a company's taxation exposure. This is done through self-insurance and the issuance of questionable or seemingly needless insurance policies by the parent company. Here's an example: Johnson Retail create an off-shore insurance company called Johnson Insurance which in turn insures Johnson Retail for loss of employee wages, fire, loss of computer equipment, etc., etc. Johnson Insurance then sets the premiums for these policies at $50,000. Johnson Retail pays the premiums and then deducts the $50,000 as an insurance cost from its taxes.
Main Captive Domiciles (2008 figures):
Bermuda: 958 (19.6% of the market)
Cayman Islands : 765 (15.6%)
Vermont: 567 (11.6%)
British Virgin Islands: 409 (8.3%)
Guernsey: 368 (7.5%)
Luxembourg: 262 (5.3%)
Barbados: 256 (5.2%)
Ireland: 224 (4.6%)
