A captive insurance company is a type of insurance company that is created and owned by a parent company or group of related companies to provide insurance coverage primarily for its own risks and exposures. Instead of purchasing insurance from a traditional commercial insurer, the parent company essentially creates its own insurance subsidiary to underwrite its risks. Captive insurance is a risk management strategy that allows the parent company to have more control over its insurance programme, potentially reduce costs and customise coverage to its specific needs.
Here are the basic steps to set up a captive insurance company:
Feasibility Study: Determine whether a captive insurance company makes sense for your organisation. Assess the types of risks you want to cover, the potential cost savings and the regulatory requirements in the jurisdiction where you plan to establish the captive.
Choose a Jurisdiction: Decide where you want to establish your captive. Different jurisdictions have different regulations and tax implications for captives. Some popular jurisdictions for captives include Gurnsey, Gibralter, Bermuda, the Cayman Islands, Luxembourg and various U.S. states.
Form a Legal Entity: Create a legal entity for your captive. This typically involves incorporating a new company in the chosen jurisdiction. The legal structure may vary depending on your specific needs, such as forming a pure captive, group captive or cell captive.
Capitalisation: Determine the amount of initial capital required to fund the captive. This capital is used to cover potential insurance claims. The amount will depend on the risks you plan to insure and the regulations of your chosen jurisdiction.
License and Regulatory Compliance: Obtain the necessary licenses and approvals from the regulatory authority in your chosen jurisdiction. This often involves submitting a detailed business plan, financial statements and other documentation to demonstrate your ability to operate as an insurance company.
Risk Assessment: Conduct a comprehensive risk assessment to identify the specific risks and exposures your captive will cover. This assessment helps determine the appropriate underwriting guidelines and pricing for coverage.
Risk Management and Underwriting Guidelines: Develop underwriting guidelines and risk management practices for the captive. These guidelines will define the criteria for accepting and pricing insurance policies.
Reinsurance Arrangements: Consider whether your captive will reinsure some of its risks with a traditional insurer to limit exposure. Reinsurance can help spread risk and protect the financial stability of the captive.
Operations and Governance: Establish the operational framework and governance structure for your captive. This includes appointing a board of directors, hiring key personnel and setting up claims handling procedures.
Compliance and Reporting: Comply with ongoing regulatory and reporting requirements in your chosen jurisdiction. Captive insurers typically need to file regular financial statements and maintain minimum capital requirements.
Premium Payments and Claims Handling: Ensure that premium payments are made to the captive and establish a process for handling claims. Claims should be assessed, paid or denied in accordance with the captive’s policies.
Review and Adjust: Continuously monitor and assess the performance of your captive insurance company. Adjust your risk management strategies, underwriting guidelines and capitalisation as needed, to ensure the captive remains effective in managing your risks.
A Few Important Captive Benefits:
Save and Manage Costs
- Accelerate cash flow though premiums, claims and reserves
- Reduce costs (commissions, taxes, risk charges, administration, underwriting)
- Capture investment return
- Improve cash flow and centralize investment of reserves
Increase Control
- Design coverage and provision of benefits
- Improves data management and claims cost management
- Remove insurers profits loading
- Improve management reporting and understanding of risks
Improve Risk Management
- Operate and manage a central risk pool
- Implement appropriate stop loss reinsurance to manage peak risk
- Reduce overall cost of risk
Setting up a captive insurance company is a complex process that requires careful planning, legal compliance and ongoing management. It’s advisable to work with experienced professionals that specialise in the formation of non-standard self-insurance placements including insurance consultants, legal experts and actuaries, to navigate the regulatory and operational complexities of captive insurance. Additionally, seek guidance from the regulatory authority in your chosen jurisdiction to ensure full compliance with local laws and regulations.
Want to learn more? Need advice? The experienced team at selfinsuranceprotect is ready to answer all your question on captive insurance companies and any other related areas of insurance. Why not give us a call today on 01245 449060
