- About Captives – Main Benefits
- History of Captives
- Pros and Cons
- Costs to Form and Operate
- Captive Types
- Domicile Selection
- Preliminary risk assessment – best 1st step
- Captive Books and Flyers
Below are common questions asked about captive insurance companies. If you have specific questions we can help you with, please contact us. Initial consultations are always free.
Captives operate as licensed insurers. Using a captive allows the tax leveraged build up of investment reserves to protect your company from unexpected losses. See our Flyers and Books for more details
Captives are formed to:
- reduce commercial insurance expenses
- retain insurance underwriting profits
- improve insurance coverages
- improve claims management
- build tax leveraged investment portfolios to provide liquidity in event of losses
- and for other related business and economic objectives
See our risk assessment page for a list of many types of custom coverage captives can write.
Government taxing authorities worldwide recognize the special nature of insurance contract arrangements and the importance of encouraging savings to address unexpected losses. Accordingly special beneficial tax rules have evolved that apply only to insurance companies. They enable you to defer, reduce and in some cases eliminate taxes otherwise applicable to non-insurance companies. Operating companies that buy insurance from a captive can deduct the insurance premiums if all requirements are met. The captive in some cases does not have to pay income taxes on its premium income. This allows for the pre-tax build-up of investments inside the insurance captive.
Captives are usually a good choice for a company with good loss control or the need to customize its insurance program and have better control over claims. Captives are mature risk transfer and finance vehicles utilized throughout the world, part of enterprise risk management known as “Alternative Risk Transfer” or “Alternative Risk Finance.”
Many companies should consider a captive if you are serious about risk management. Historically captives were thought to make sense only for companies with very high commercial insurance expenses or unable to get required insurance (such as professional malpractice coverage) from commercial insurers. Due to legal innovations and declining capital requirements and operating costs, this is no longer true. All companies today should make time to do a preliminary risk analysis and captive assessment.
To assure long-term success, begin the process by having us do a preliminary assessment, and if a decision to form is made, a formal feasibility study in connection with assembling the formation and license application package for submission to the selected domicile. An independent feasibility study can be completed for as little as $5,000.
- While we charge considerably less, without compromising quality, most competing firms that know what they are doing charge around $50,000 the first calendar year for a US domiciled pure captive. The largest established captive managers (top 5 in number of captives under management) generally charge in the $45,000 to 65,000+ range for formation year turnkey services. We usually charge considerably less despite providing excellent service. If our firm is not the best fit for you, we can introduce you to and educate you on what to expect from the larger firms. Every captive is truly unique and must be carefully customized. See our Flyers and Books for more detail.
- Feasibility studies to determine if you should form a captive and what its initial insurance program should look like start in the $7500 range. We always involve an outside independent actuary in our feasibility study engagements to assist with risk assessment, policy design and policy pricing. We also require a review annually by an outside actuary of our client captive programs.
- Start up capital varies. A bank letter or credit (or trust facility) can often substitute for cash capital to minimize captive program start-up costs. For a US reporting captive, start-up capital should not be lower than 20% of the first year premium levels even if the licensing domicile requires less. Pure US captives typically have $250,000 of start-up capital/surplus as this is nearly what every US state requires unless your captive program is designed purely as a reinsurance captive. Hybrid cell/series US captives, or offshore captives, should meet minimally a 5:1 ratio of premiums to capital in the first year (if qualifying for the 831(b) special election to exclude premium income from income taxes is an objective), and 3:1 ration by year two (2). This 3:1 ratio is most typical of global commercial insurer standards of capital/premium ratios.
- Premiums are in addition of course to start-up costs and initial required capital/surplus to apply for an insurance license.
Managing a captive involves a wide range of activity that varies to some degree from captive to captive. Some of the duties and responsibilities are common to any business. Others require specialized knowledge and professional skills. Fortunately experienced experts are available who offer contract management services so you can run a captive business literally without any employees if your current staff does not have the time or expertise. Determining what scope of services you will need, and how best and most cost effectively to harness the resources needed, should be part of any quality comprehensive feasibility study.
Ongoing operating costs vary widely depending on type of captive and types of insurance program involved. If using a large established manager, expect in the range of $55,000 to $65,000 a year to operate a relatively simple pure US domiciled captive, especially if risk pooling is recommended. We of course usually charge considerably less. See our introductory Flyer for more details.
Click here for a discussion of types of insurance captives write and risk assessment/underwriting process.
- required capital must be held in cash equivalents
- premium revenue can be invested with substantial discretion, keeping in mind however the liquidity needs of the captive to timely pay potential claims
- surplus (prior year premiums no longer held in loss reserves and this true retained surplus) can be invested even in illiquid investments, such as loans, with regulatory approval. Surplus may also be paid in approved dividends.
Risk pools involve unrelated captives and/or parties sharing in loss exposure, essentially equivalent to typical commercial insurance. Captives often are required to participate in risk pools to meet the definition of an insurance company for tax or other regulatory purposes. Risk pools vary widely and are discussed in significant detail in some of our books and flyers. We also believe risk pool participation is beneficial irrespective of tax concerns as well run risk pool programs should not increase a captive’s capital requirements yet protect it from high velocity severe loss exposures. We like risk pools that bundle a variety of risks both homogenous and heterogenous although for reasons not all that clear most people today still believe homogenous risk pools are more appropriate. This is more based on historical practice then actuarial and risk management science.
No two managers or service providers are alike. While we guarantee the lowest reasonable pricing for high quality work, we are picky about who we can work with, as you also should be. Managers vary more widely than regulatory domiciles. The only way to determine who is a good fit for you is to do a preliminary assessment for each client prospect and then discuss options. If we are not a good fit for you, we will recommend a good fit as we work with most leading global firms and providers in this industry.