Download - Financing Retained Risk
Structure – What is a Captive?
• Insurance subsidiary of a commercial/financial company, or a consortium or an association of individuals
• Formed to primarily insure, or reinsure the risks of its parent, or of a number of parties with risks in common or unrelated risk
• Usually formed in a specialized environment or “domicile” – “onshore” or “offshore”
Reducing Risk Management Costs
• Controlling destiny through progressive retentions
• Access to Reinsurance
• Reduced Dollar Swapping
• Improved Loss Control incentive
• Tax savings
Tax
• Acceleration of deduction– Humana– Non-Related
• Arbitrating U.S. Tax Rate• 953(d) Election• Pooling• Premium Tax
Solving Problems
• Coverage– e.g.
• D&O
• E&O
• Product Recall
• Administrative– Consolidation of Programs
– Rationalization of Deductibles
Profit Center
• Customer Programs
– Warranty
– Disaster Recovery
– Cell Phone
– Credit Life
• Other
– Suppliers
– Contractors
Structure – Types of Captives
• Single Owner
• Multi-owner or Association
• Rent-a-Captive – multiple non-owner
• Protected or Segregated Cell Captive (PCC, SPC, SAC) – any of the above
Association Captives
• Generally a hard market phenomenon
• Commitment to feasibility essential
• Risk Sharing must be understood
• Most effective when solving a common problem
• Homogenous or Heterogenous
Rent-a-Captives
• Sponsored by insurers or brokers
• Rent-a-Captive vs Segregated Cell
• Relationship established through Shareholders Agreement
• Indemnity Provision
• Dividend distribution process
Decision Making Process
• Level of Retention
• Form of Retention
• If captive, which domicile
• Feasibility study should address all 3
Domicile Comparison
987
733
542
439382
208 207165 158 122
0
100
200
300
400
500
600
700
800
900
1000
Berm
uda
Caym
an Is
lands
Verm
ont
Barbad
os
Guer
nsey
Luxembourg
Dublin
Isle
of M
an
Hawai
i
South C
arolin
a
Why Bermuda
• Why not?
• Experience
• The Insurance and Reinsurance Market
• Geography
• Flexibility
Bermuda Incorporation Procedure
• Select a Law firm
• Select a Manager
• Select a Name
• Submit Shareholder information for approval
• Submit Pre-Incorporation information
• Submit Form 1B for registration together with confirmation capital is paid in
Established License Classes
• Established “Classes of Insurers”
– Class 1 – Single Parent Captive
– Class 2 – Association Captive/20% unrelated
– Class 3 – Catch all – “third party company”
– Class 3 A - 50% Unrelated, less than $50M
– Class 3 B – 50% unrelated, more than $50M
– Special Purpose Insurer
– Class 4 – CAT Companies/Publicly listed companies
Captive Running Costs
Approximate Costs of Incorporating and Operating
a Single Parent Captive in Bermuda
Costs of Incorporation Captive Costs
Lawyers Fees $10,000
Government incorporation disbursements $1,265
Registration – Companies Act* $3,820
Registration – Insurance Act $971
$16,555
Annual Operational Costs
Lawyers Fees $6,000
Estimated Captive Management Fee $50,000
Registration – Companies Act* on $120K capital $3,820
Registration – Insurance Act class 1 $971
Audit Fee – estimate $20,000
Other $3,500
$85,890
*Please note that this table gives an approximation of the costs associated with incorporating and operating a captive in Bermuda. Professional service fees vary by firm.
Other services such as actuarial valuations and tax advice may be required