CAPTIVE STRUCTURES
“The term pure captive now sounds as dated as would, say, a Model-T Ford to the motor industry, but it is from the pure captive that the family of options sprang.”
In this regard, the association captive is the nearest family member to the mutual. Participants share risks at a predetermined layer.
The parent companies of an association captive are often industry, trade or service groups that pool capital and take advantage of the benefits of captive insurance that their relatively small individual scale might not otherwise make feasible.
Again, the risks of participants’ affiliated companies are usually included in the association captive’s portfolio. As with the single- parent captive, operating functions are carried out either by dedicated staff or, more usually, by a captive management company. Association captives are occasionally called joint venture captives.
Group captives Captives with multiple parents are jointly owned, often by members in the same industry or by groups of companies with the same particular insurance needs that cannot be met elsewhere. Group captives are also called homogenous captives. Group coverage enables participants to tailor coverage to suit their needs.
Today, group captives are used mainly to write workers’ compensation, auto liability and damage, and general liability insurance and reinsurance. Group captives often engage in a significant amount of third party business.
Rent-a-captives A rent-a-captive is an insurer or reinsurer that rents its capital, surplus and legal capacity to client users for a fee. It is they, rather than the policyholders, who control the rent-a-captive, which usually provides administrative services, reinsurance, and/or an admitted fronting insurer. There is, generally, no sharing of risk among participants.
Fronting is the term used for a specialised form of reinsurance often employed in the captive insurance marketplace. A commercial insurance company (the fronting company), which is licensed in the state in which the risk is located, issues its policy to the insured. That risk is then fully transferred from the fronting company to a captive insurance company through a fronting agreement. The insured thus obtains a policy issued on the paper of the commercial insurance company, although the captive company retains the risk.
The underwriting account of the insured is typically segregated from those of other clients of the company. The necessary separation can be
30 CICA | Forty years of captive leadership achieved by contract, through accounting procedures or statutorily.
Many companies not large enough to form their own captive find that a rent-a-captive provides the opportunity to obtain benefits similar to those from owning a captive, in a less complex manner.
Over time, if the captive activity proves successful, the underwriting profits plus investment income may be returned to the participants. Rent-a-captives generally have higher fixed costs, but lower barriers to entry, than many alternatives.
Agency captives An agency captive is a reinsurance company owned by a separate insurance company, one or more insurance agents, or brokers to reinsure portions of their clients’ risks.
Agency captives benefit the insurer, agent(s) or broker(s) that own the company. Agents and brokers are often compelled to form captives to provide markets for their clients when the commercial insurance market is unwilling to do so at a price acceptable to the putative insured.
Segregated portfolio companies Also known as protected cell companies (PCCs), these captives were originally formed to facilitate transactions in a range of financial disciplines, with banking seen as the most likely candidate. Insurance companies quickly realised the possibilities in the insurance arena and it is in insurance that PCCs have found their greatest application to date.
PCCs may be formed as rent-a-captive facilities to enable companies that lack sufficient insurance premium volume, or which are averse to establishing their own insurance subsidiaries, to access many of the benefits associated with a captive insurance company.
The income, assets and liabilities attributable to each cell in the umbrella company are kept separate from those of all other cells and that of the company providing the cells. Cell segregation may vary by demographics, risk profile and lines of coverage. Guernsey took the lead in the development of PCCs, but legislation has been approved in the past 12 years in all the major domiciles.
Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. The cost
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