What in the world is captive insurance?
Welcome to the sexy world of captive insurance, not one of your better known types of insurance. In a nutshell, captive insurance is self-insurance. A captive insurance company is an insurance company that principally insures the risks of businesses that are related to it through common ownership. The insured businesses pay premiums to the captive in exchange for insurance. The captive can be owned by the business owner or by his or her spouse, relatives, a trust, or any of the companies he or she owns.
Most captive insurance is general liability or workers’ compensation insurance. Medical malpractice and professional liability are also mainstays of the industry. Newer risks being transferred include construction defect liability and worker disability. As few companies are in the business of insurance themselves, all but the largest use the services of external managers to handle the day-to-day demands of running an in-house insurance company.
There are several main types of captive company. A single parent captive is an insurance or reinsurance company that is a wholly owned subsidiary, formed primarily to insure the risks of its non-insurance parent or affiliates. An association captive is an insurance or reinsurance company owned or sponsored by a trade, industry or service group for the benefit of its members. A group captive is an insurance or reinsurance company jointly owned by a number of typically unrelated companies, created to provide a vehicle to meet a common insurance need. A segregated portfolio company is a single legal entity divided into an unlimited number of cells whose assets and liabilities are legally separated from each other.
Formed in 1999 in the Cayman Islands, Kensington Management manages a diverse portfolio of single parent and member-owned group captive insurance companies. These programs write annual premiums in excess of $800 million and service the needs of more than 2,200 corporate and institutional clients. Kensington is a full-service management firm, providing the complete range of management and advisory services.
According to Kensington Management, there are a number of reasons to establish a captive insurance company. Through effective risk-control practices and efficient claims management, underwriting profits previously earned by the conventional insurer can be maximised and retained. Although there are costs involved in running a captive, sales, advertising and promotional expenses are less, so premiums can be reduced. Captives also have the ability to earn investment income on underwriting premium prior to its application to pay claims.
Formed in 1999 in the Cayman Islands, Kensington Management manages a diverse portfolio of single parent and member-owned group captive insurance companies.
Often, captive owners can time the payment of premiums to best suit cash flow needs, a benefit not readily available in the conventional market. Conventional insurance is cyclical, and there may be a reluctance to insure certain risks, or some coverage lines may be too expensive. Captive insurance companies have the flexibility to offer customised policies that are not otherwise available in the traditional market. Captives can directly access the reinsurance markets, so reinsurance can be obtained at a lower cost than in the conventional market where insurers build in a level of profit in return for providing access to reinsurance. Members of group and association captives reap additional benefits from the expertise of other members regarding loss prevention and managing claims. Captive owners can therefore minimise the risks associated with their profession.
When forming a captive, the domicile’s regulatory environment is an important consideration. An offshore jurisdiction allows the captive to avoid restrictive and bureaucratic governmental regulations. In the Cayman Islands, where Kensington Management is based, there are no income, corporation or premium taxes. The government offers a renewable 20- year guarantee against the imposition of such taxes. However, as most Cayman captives are structured as “controlled foreign corporations,” shareholders are still required to report earnings and profits.