Brokering International Business Acquisitions - Since 1991
San Diego - Zurich


The cost of insurance represents a considerable expense for most businesses. In recent years, premiums have skyrocketed leading many professionals to explore creative cost reduction strategies. One imaginative – yet proven – strategy is the use of wholly-owned subsidiaries to meet insurance needs which can control or even cut expenditures. Captives can be established to self-insure part or all of property loss, product liability, work compensation, malpractice and virtually any other coverage. Consequently, the driving force behind the move to offshore captive insurance 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. As a result, Captive Insurance Companies have become a growing and significant sector of the global insurance industry.

What is a Captive Insurance Company?

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. Those insured risks are frequently reinsured through a large multinational carrier.

The types of captive insurance companies 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.

How much does it cost?

Costs to establish a captive vary considerably. Licensing expenses range from $18,000 on the low end to $100,000 or more and differ based upon location. Paid-in-capital requirements – which are funds posted for the benefit of the offshore entity – will also be encountered. Those requirements will likely range from $250,000 to well into seven figures. Paid-in-capital assets are not expenditures but will still need to be deposited for the benefit of the entity.

The best known location …Bermuda

Bermuda is home to more than half the world’s captive insurers with nearly $60 billion in assets and more than $16 billion in annual premiums. Located 650 miles east of Cape Hatteras or an hour and a half flight from New York City, this international financial center is one of the most prestigious financial business addresses. It offers low taxes, political stability and a sophisticated business infrastructure. Bermuda represents the third largest insurance market only trailing the United States and the United Kingdom. This jurisdiction is also known for quality and straightforward business dealings. Scandals are rare and their banking system is impeccable. Anyone interested in establishing an international business structure in this country should be prepared for substantial expense and disclosure. For example: each insurance applicant will need to provide background information and bank references to the Bermuda Monetary Authority. In addition, the captive business plan and strategy will be investigated by the Registrar of Companies. If, however, prestige is what you desire, this tropical haven should receive serious consideration.

Conclusion

The bottom line is that a captive insurance company can be a very valuable tool although certainly not inexpensive to establish and operate. If the initial outlay is warranted, however, the long term savings and control can be a tremendous benefit to your business. As would be anticipated, quality planning is critical to maximize advantages and properly shift risk to the captive.

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