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Potential benefits of a Captive
At regular intervals, organisations evaluate their insurance coverage in relation to premium costs and the frequency and severity of claims. They may also consider the availability of various types of insurance in the conventional market. The captive insurance company constitutes an alternative which may produce a substantial reduction in insurance costs, as well as making coverage available.
The evaluation of an insurance programme will include the insurance requirements of the organisation. These requirements may change from year to year as different functions or product lines are commenced or discontinued by the organisation. Insurance from conventional sources may be obtained to satisfy those requirements but in instances where it is not available at all, or only in restricted form, the captive may be the sole means by which the organisation may be able to develop the insurance programme required and maintain continuity of coverage thereafter.
The benefits accruing to the owner/insured in a captive programme will vary but the major advantages generally fall into the following categories:
Cost Savings
A captive insurance or reinsurance programme should operate at an expense factor lower than that of a conventional insurer. Lower premiums for the same coverage or profit being derived by maintaining premium levels, will lead to an effective reduction in future insurance costs. Economies result from the elimination of the profit element built into premiums charged by commercial insurers, and the reduction of expenses through the avoidance of the duplication of activities in such areas as the administration and settlement of claims, safety and loss control.
Access to the Reinsurance Market
A captive has access to the reinsurance market. Reinsurance companies work on lower expense ratios than direct insurers. Thus reinsurance may be obtained at a lower cost than conventional direct insurance. Commissions may also be earned on the reinsurance ceded which may also reduce the overall cost of insurance.
Coverage Availability
Cyclical changes in the insurance markets, poor underwriting results, and a reluctance to insure certain risks, may cause some lines of insurance to be unavailable other than at an unacceptably high premium or on extremely restrictive terms. A captive insurance company may be the only realistic way to insure such risks.
Cash Flow Management
Premiums and reserves may be invested for the benefit of the captive. In conventional insurance, investment income would be retained by the insurer. Benefits may also be gained by restructuring the payment of premiums, thereby tailoring cash flow to individual requirements.
Control
Greater control may be exercised on risk management issues such as loss control, loss reporting procedures and safety programmes which may result in a reduction in frequency and severity of claims. In addition, the captive may adopt a more focused approach to claims settlements than a third party insurer.
Continuity of Cover
Insurance programmes of captives may be designed precisely to meet the global requirements of its shareholders and to achieve continuity of cover.
Taxation
The correct structuring of a captive and the conduct of its business may produce tax benefits to the company and its shareholders. Tax planning in relation to offshore companies is complex and expert advice on the subject should be sought at the outset.
