Captive insurance
Encyclopedia
Captive insurance companies are insurance
companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group's customers as well. Using a captive insurer is a risk management
technique by which a business forms its own insurance company subsidiary to finance its retained losses in a formal structure.
s with the primary jurisdiction known as the captive's domicile
. Many captive insurers make their home "offshore." Belize
, Bermuda
, The Cayman Islands, Ireland
, Guernsey
, Luxembourg
, Barbados
, Malta
, Singapore
, Anguilla
, the British Virgin Islands
, Qatar Financial Centre and Dubai International Financial Centre are a few examples.
Bermuda
was once a leading offshore captive domicile, and its market dominance has long snce decreased as many jurisdictions enacted captive-friendly legislation to attract or preserve this type of business. The onshore regulatory burden and cost of operating either a US-based or Lloyd's-based captive in the early 1960s drove Reiss to seek out a jurisdiction that would allow his captive concept to flourish. After significant travel and investigation, Bermuda was Reiss' first choice for its geographic location, clean reputation and its position as a British Dependent Territory, which removed the risks and uncertainties often experienced by international businesses operating in politically unstable and unaccountable jurisdictions. Bermuda's captives are predominantly owned by large US corporations. Thus, for instance, American International Group (AIG) operated a captive insurance scam that involved fraudulent use of Bermuda as an offshore tax haven. The Cayman Islands is the second largest licensing jurisdiction in terms of the number of captives licensed. Vermont is second in terms of insurance company assets but third in terms of captives licensed.
In the United States
, Vermont
is home to more captive insurers than any other US state, with nearly 900 licensed captive companies as of August 2009.
Because premiums paid to captives are deductible, the terms of the policy (including the premium amount) must be reasonable. A captive cannot arbitrarily set the premium amount simply to generate a deduction for the parent. For example: Smith Dentists Inc. is insured by the company's captive, Acme Insurance, for loss of employee wages, fire, loss of computer equipment, etc. Acme Insurance cannot arbitrarily set the policy premium at $50,000, but, rather, should base the premium amount on actuarial projections.
In the European Union, a new set of regulatory requirements (Solvency II
) is planned with additional tasks and responsibilities for captives and reinsurance companies. Some European captives ask for simplified regulation.
and Aon Corporation -- the two largest commercial insurance company brokerages in the world. Each manages more than 1,000 captive insurers.
Not listed above by Business Insurance News is Anguilla which has more than 200 captives as of August 2009.
* 2008 Updated stats. Source: Business Insurance News Captives 2008
** 2008 Updated stats. Source: http://www.captive.utah.gov/hotnews.html
# 2007 Updated stats. Source: LOFSA 2007 Annual Report
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group's customers as well. Using a captive insurer is a risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
technique by which a business forms its own insurance company subsidiary to finance its retained losses in a formal structure.
Origin of term
The term "captive" comes from the "father of captive insurance", Frederic M Reiss, who coined the term while he was bringing his concept into practice for an industrial client in Ohio in the 1950s. The term "captive" came to Reiss when working with his first client, the Youngstown Sheet & Tube Company. The company had a series of mining operations and its management referred to the mines whose output was put solely to the corporation's use as captive mines. When Reiss helped the company incorporate its own insurance subsidiaries, they were referred to as captive insurance companies because they wrote insurance exclusively for the captive mines. Reiss continued to use the term for his concept, and both the captive and the term have adopted a far wider context. The term also made sense as the policyholder owns the insurance company i.e. the insurer is captive to the policyholder. If the captive insures only its parent and affiliates it is called a pure captive.Domicile
Captives are licensed by many jurisdictionJurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
s with the primary jurisdiction known as the captive's domicile
Domicile
*In architecture, a general term for a place of residence or "permanent residence" in legal terms*Domicile , the zodiac sign over which a planet has rulership...
. Many captive insurers make their home "offshore." Belize
Belize
Belize is a constitutional monarchy and the northernmost country in Central America. Belize has a diverse society, comprising many cultures and languages. Even though Kriol and Spanish are spoken among the population, Belize is the only country in Central America where English is the official...
, Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, The Cayman Islands, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Guernsey
Guernsey
Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, Barbados
Barbados
Barbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint...
, Malta
Malta
Malta , officially known as the Republic of Malta , is a Southern European country consisting of an archipelago situated in the centre of the Mediterranean, south of Sicily, east of Tunisia and north of Libya, with Gibraltar to the west and Alexandria to the east.Malta covers just over in...
, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Anguilla
Anguilla
Anguilla is a British overseas territory and overseas territory of the European Union in the Caribbean. It is one of the most northerly of the Leeward Islands in the Lesser Antilles, lying east of Puerto Rico and the Virgin Islands and directly north of Saint Martin...
, the British Virgin Islands
British Virgin Islands
The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
, Qatar Financial Centre and Dubai International Financial Centre are a few examples.
Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
was once a leading offshore captive domicile, and its market dominance has long snce decreased as many jurisdictions enacted captive-friendly legislation to attract or preserve this type of business. The onshore regulatory burden and cost of operating either a US-based or Lloyd's-based captive in the early 1960s drove Reiss to seek out a jurisdiction that would allow his captive concept to flourish. After significant travel and investigation, Bermuda was Reiss' first choice for its geographic location, clean reputation and its position as a British Dependent Territory, which removed the risks and uncertainties often experienced by international businesses operating in politically unstable and unaccountable jurisdictions. Bermuda's captives are predominantly owned by large US corporations. Thus, for instance, American International Group (AIG) operated a captive insurance scam that involved fraudulent use of Bermuda as an offshore tax haven. The Cayman Islands is the second largest licensing jurisdiction in terms of the number of captives licensed. Vermont is second in terms of insurance company assets but third in terms of captives licensed.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Vermont
Vermont
Vermont is a state in the New England region of the northeastern United States of America. The state ranks 43rd in land area, , and 45th in total area. Its population according to the 2010 census, 630,337, is the second smallest in the country, larger only than Wyoming. It is the only New England...
is home to more captive insurers than any other US state, with nearly 900 licensed captive companies as of August 2009.
Policies
Reiss conceptualized the captive to provide his clients with coverages they needed but could not obtain through the traditional insurance market, thereby reducing the high cost of insurance to large corporations. The most common use of captive insurance is to provide liability coverages for those lines of business, such as workers' compensation, that have regular and predictable loss payments and for working layer professional liability coverage in order to access the reinsurance market, including Lloyd's syndicates, for excess protection that may be unavailable or cost-prohibitive at the primary level such as products liability, general and professional liability and directors and officers liability. Vehicle insurance, both property damage and third party liability of corporate fleets and vehicles is also quite common.Regulation
For some lines of business a captive can operate without restriction. In other cases, such as workers' compensation in the U.S., for example, a captive often must go through a fronting process. They pay a fee, usually somewhere between 5 and 15 percent, to participate in the risk. The fronting insurer issues the required policy using its insurance licenses and then the company "cedes" (sends some or all the risk and some of the premium) to the captive. If there is a loss, the captive provides the funding to pay the loss even though the contractually responsible party from the injured party’s perspective is the commercial "front".Because premiums paid to captives are deductible, the terms of the policy (including the premium amount) must be reasonable. A captive cannot arbitrarily set the premium amount simply to generate a deduction for the parent. For example: Smith Dentists Inc. is insured by the company's captive, Acme Insurance, for loss of employee wages, fire, loss of computer equipment, etc. Acme Insurance cannot arbitrarily set the policy premium at $50,000, but, rather, should base the premium amount on actuarial projections.
In the European Union, a new set of regulatory requirements (Solvency II
Solvency II
The Solvency II Directive is an EU Directive that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency....
) is planned with additional tasks and responsibilities for captives and reinsurance companies. Some European captives ask for simplified regulation.
Captive Manager
Reiss created the first captive management company, International Risk Management Limited (IRML), in Bermuda in 1962 to provide the administration of his client's captives. Most captive management is usually outsourced to a captive manager located in the jurisdiction that holds the primary license for the captive. The two largest captive insurance company managers in the world are units of Marsh & McLennan CompaniesMarsh & McLennan Companies
Marsh & McLennan Companies, Inc. is a US-based global professional services and insurance brokerage firm. In 2007, it had over 57,000 employees and annual revenues of $10.49 billion. Marsh & McLennan Companies was ranked the 221st largest corporation in the United States by the 2009 Fortune 500...
and Aon Corporation -- the two largest commercial insurance company brokerages in the world. Each manages more than 1,000 captive insurers.
Main captive domiciles
| Domicile | Captive Number | Percentage |
|---|---|---|
| Bermuda Bermuda Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida... * |
|
|
| Cayman Islands Cayman Islands The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica... * |
|
|
| Vermont Vermont Vermont is a state in the New England region of the northeastern United States of America. The state ranks 43rd in land area, , and 45th in total area. Its population according to the 2010 census, 630,337, is the second smallest in the country, larger only than Wyoming. It is the only New England... * |
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| Guernsey Guernsey Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet... * |
|
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| Luxembourg Luxembourg Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south... * |
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| Barbados Barbados Barbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint... * |
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| Ireland Ireland Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth... * |
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| British Virgin Islands British Virgin Islands The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S... * |
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|
| Hawaii Hawaii Hawaii is the newest of the 50 U.S. states , and is the only U.S. state made up entirely of islands. It is the northernmost island group in Polynesia, occupying most of an archipelago in the central Pacific Ocean, southwest of the continental United States, southeast of Japan, and northeast of... * |
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| South Carolina South Carolina South Carolina is a state in the Deep South of the United States that borders Georgia to the south, North Carolina to the north, and the Atlantic Ocean to the east. Originally part of the Province of Carolina, the Province of South Carolina was one of the 13 colonies that declared independence... * |
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| Isle of Man Isle of Man The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is... |
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| Nevada Nevada Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its... * |
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| Arizona Arizona Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix... * |
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| Utah Utah Utah is a state in the Western United States. It was the 45th state to join the Union, on January 4, 1896. Approximately 80% of Utah's 2,763,885 people live along the Wasatch Front, centering on Salt Lake City. This leaves vast expanses of the state nearly uninhabited, making the population the... |
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| Turks & Caicos | |
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| Singapore Singapore Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the... |
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| Sweden Sweden Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund.... |
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| Switzerland Switzerland Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition.... |
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| District of Columbia | |
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| Labuan Labuan Labuan is a federal territory in East Malaysia. It is an island off the coast of the state of Sabah. Labuan's capital is Victoria and is best known as an offshore financial centre offering international financial and business services via Labuan IBFC since 1990 as well as being an offshore support... # |
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| New York New York New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east... |
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| Netherlands Netherlands The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders... |
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| Vanuatu Vanuatu Vanuatu , officially the Republic of Vanuatu , is an island nation located in the South Pacific Ocean. The archipelago, which is of volcanic origin, is some east of northern Australia, northeast of New Caledonia, west of Fiji, and southeast of the Solomon Islands, near New Guinea.Vanuatu was... |
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| Bahamas The Bahamas The Bahamas , officially the Commonwealth of the Bahamas, is a nation consisting of 29 islands, 661 cays, and 2,387 islets . It is located in the Atlantic Ocean north of Cuba and Hispaniola , northwest of the Turks and Caicos Islands, and southeast of the United States... |
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| Total | |
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Not listed above by Business Insurance News is Anguilla which has more than 200 captives as of August 2009.
Further Reading
- Sierk, R. Wesley, Taken Captive: How to Capture Your Piece of America's Multi-Billion Dollar Insurance Industry RMA PRESS, 2008 www.takencaptive.com. ISBN 978-0-9801925-0-6
- Adkisson, Jay D., Adkisson's Captive Insurance Companies: An Introduction to Captives, Closely Held Insurance Companies, and Risk Retention Groups. iUniverse, Inc., 2006. ISBN 0595422373; ISBN 978-0595422371.
- Duffy, Catherine R. Held Captive. A History of International Insurance in Bermuda. Toronto, ON. Oakwell Boulton, 2004. ISBN 0-920831-99-0
- Captive Review provides a global trade publication, website, training seminars, conferences and data products
External links
- Book: Taken Captive by R. Wesley Sierk, IIII http://takencaptive.com/captiveins.aspx