Also known as Captive Insurance Companies, offshore insurance companies have as an important part of the global insurance industry. Over the last twenty-five years, multinational corporations and professionals have looked to captives to provide protection against risk while lowering costs.
A captive is defined as an insurance company established in an offshore jurisdiction, created and controlled by either a parent company or professional association through which their own risk is insured. http://en.wikipedia.org/wiki/Captive_insurance Those insured risks are frequently reinsured through a large multinational carrier.
The driving force behind the move to offshore captives is the ever-upward spiral of insurance costs. This trend extends virtually across all industries including, but not limited to, medical malpractice, workers compensation, manufacturing, financial, energy-related, and real estate developers, just to name a few. Over 350 of the Fortune 500 companies in the United States have insurance captives located in Bermuda. Many others have captives located elsewhere.
The subject of insurance against acts of terror has been a “hot” topic for the last decade. For industries such as special events, sports and high profile commercial real estate, being able to obtain insurance has become elusive; especially when there are potential threats of terrorism. The Dow Jones reported back on February 7, 2002, that neither the US Olympic committee nor Salt Lake City had been able to obtain adequate coverage to cover lawsuits in case athletes, organizers or visitors were injured during the Winter Olympics. In that same month, the Dow Jones again ran a statement issued by a spokesperson for the Miami Dolphins who said the team does not have any terrorism insurance, and other NFL teams were encountering the same difficulties. Reuters wire service reported as recently as January 2008 that the organizers for the Oscar awards ceremony in March of that year were having difficulty getting enough insurance and the event was at one time in jeopardy of being cancelled. Even with the US Federal Terrorism Risk Insurance Act (TRIA) http://en.wikipedia.org/wiki/Terrorism_Risk_Insurance_Act the ability of insurance to cover such abhorrent events are still being questioned.
Amidst all obstacles, there are many options to consider. One is to discontinue insurance coverage if the premiums do not cover essentials, which could be disastrous. Another is to accept the terms of the insurance company with the heavy premiums and minimal coverage, which does not make good business sense. Lastly is the option to acquire an offshore captive insurance company and self-insure. More than ever, the use of captive insurance companies is now being seen as an integral and affordable part of general business risk management. Typically, captives are acquired to insure the risks of the parent company and do not accept risks from outside parties. The types of captives are defined as follows:
Single Parent Captive: Insurance Company which is a wholly owned subsidiary.
Association Captive: Insurance Company owned by a trade industry or group for the benefit of its members.
Group Captive: Insurance Company jointly owned by a number of companies created to meet a common need.
Rent-a-Captive: Owner of a captive offers insurance services to those interested for a fee.
Costs to establish a captive vary considerably. Licensing costs range from $18,000 to $100,000. Paid-in-capital requirements, which are funds posted for the benefit of the offshore entity will also be encountered and will likely range from $250,000 to well into seven figures. The bottom line is that captive insurance companies, no matter the motivation, can be a very valuable tool but certainly are not inexpensive to establish and operate. Therefore, quality planning is critical to maximize advantages and properly shift risk to the captive.