Wealth Generation and Preservation

When access to capital is difficult, and insurance premiums firming to unknown previous high levels, our clients are best placed to assume greater control of their risk management and cost controls. There has never been a better opportunity for our clients with strong balance sheets, to benefit from the considerable advantages of establishing their own captive.

Wilton has direct experience of designing, establishing and managing protected cell companies. We work with our clients to assist them, acting as principal, to build and develop their own captive insurer.

The initial establishment of a captive cell is often driven by the need for insurance coverage for previously uninsurable risk, or based on a new debt issuance. This then leads to wider use and application within the clients personal and business interests.

Introduction to Captive Insurance

One of the biggest challenges facing businesses and family offices today is risk management. A tool that should be considered is the use of captive insurance.

The benefit of captive insurance is that it allows a client to manage risk itself rather than depend on a commercial carrier. Standard risk management policies such as product and property liability coverage may not include hidden risks such as loss of a key customer, supplier or data; theft or forgery by an employee; or breach of data, among others.

Once formed, a captive insurance company functions the same as a traditional insurance carrier, by issuing a policy and receiving premium payments from its parent company.

1. What is a captive insurance ?

Captive Insurance is a form of self-insurance where the insurer is owned by the insured. This allow you to take control of your insurance costs, cover and service needs.

2. What is the difference between self insurance and captive insurance?

Self-insurance is a general term used to describe funding that has been set aside for future losses. Among its meanings, self-insurance could refer to a simple loss fund, a savings account, or even a rainy-day fund. Self-insurance generically could also refer to a more sophisticated financial arrangement such as captive insurance. As a type of “self-insurance,” captive insurance is a formal plan whereby a business owner forms his or her own bona fide insurance company to fund losses.

3. What are the benefits of creating a captive insurance company?

The primary benefit of a captive insurance company is to guarantee that the type of risk management coverage needed by the parent company is available. It avoids the possibility that the commercial insurer may withdraw from the market, leaving no coverage available.

Other benefits may include:

* The parent company is able to control the cost of its insurance premiums.

* There is no automatic increase in premiums, as is often the case with a commercial carrier, so it stabilises the insurance budget of the parent company.

* Premium payments are tax deductable for the parent company but are not taxable for the captive.

* The captive insurance company can re-invest the premium collected under guidelines that are broad and flexible.

* The parent company can insure all or some of its risks with the captive.

4. How do you determine whether a captive insurance company is the right strategy?

There is no specific criteria to determine whether a company should create a captive insurance company, but there are some guidelines.

Good candidates for creating a captive insurance include:

* A  business that has substantial self-insured or uninsured business risk. The greater the risk, the more important coverage becomes.

* A company that has significant third-party insurance expense. Paying premiums to a subsidiary is a way to retain the wealth of the parent company when no claims are submitted.

5. Are captive insurance companies regulated?

Like any other insurance company, a captive is subject to regulation, and will be subject to the same corporate governance matters as other subsidiaries in the consolidated group, including establishing a sound business plan.

6. What can captive insurance reserves and profits be used for?

The investment guidelines are broad and flexible for the investment of captive reserves and profits, and can be used in a multitude of ways to further benefit the captive. For example, policyholders could underwrite additional lines of coverage without the need for additional capital and provide premium holidays on programs.

Profits can also be loaned back to the parent company, or distributed for the benefit of shareholders and their families.

7. What if I want to maintain my relationship with my existing insurance broker?

Your existing broker can be brought into the insurance program, and can continue to place the risks you wish to put to a re-insurer. He would be appointed by your captive to manage this process. He could continue to take his commission or could be put on a retainer from your captive. The element of risk he cannot place, or you wish to self insure will be retained by your captive.