Those with substantial insurance needs for business applications might find it useful to study the concept of captive insurance. Robert Miller explains.

Individuals and corporations looking to become more efficient and better insulated through the use of an offshore centre should consider the establishment of a captive insurance scheme as part of an holistic approach to group restructuring, security and the protection of assets.

In general terms, a captive insurance company is one owned by an organisation whose primary interests are unrelated to the business of insurance. By definition it is the risks, or a portion thereof, relating to the operations of the parent, and which the parent is free to redirect, which a captive will insure.But the application extends beyond the single-parent captive underwriting risks of related companies. For example, the following variations on the theme are common:
• Rent-a-captives: Owned by unrelated parties, used for programmes too small to justify incorporating their own captive or where separate ownership may be important for tax planning reasons.
• Association captives: Formed by members of a common occupational, production or service group in order to spread risk among its members.
• Agent captives: Promoted by independent agent or agents to write high-quality risks. In the case of such an agent captive, the agents and the insured may share profits based on their respective contributions.
• Captive pools: Formed to spread captives' diverse risks and to enable participation in non-related business.
• Captives: Formed to provide capacity where cover is unavailable or prohibitively expensive in the traditional market. They frequently provide excess cover and are substantially capitalised.
• Protection & Indemnity (P&I) Clubs: Captives writing protection, indemnity and industry-associated risks for members of the maritime industry.
Why and when a captive?
First, a thorough feasibility study will determine whether a captive is appropriate to support risk management and other objectives. Such a study will embrace a review of existing cover, premium costs, loss history, and add together values at risk. It will also cover risk management techniques already practised and/or contemplated, and possible reinsurance costs. An actuary, or risk manager may be called in to assist with the study.
Captives are formed for a variety of commercial reasons:

• Unavailability of coverage: Prohibitive premium rates may be encountered, especially with liability lines, excess covers and catastrophe risks. Some risks are simply uninsurable in the traditional market. Captives are established to provide cover otherwise not available and may provide ongoing coverage at manageable rates.

• Cost saving: The costs of risk management may be substantially lowered by the establishment of a captive profit centre. A conventional insurer's costs, commissions, overheads and profits may take up to as mush as 40% of the annual premium. A captive reduces costs, and (depending on claim handling costs) there should be underwriting profits.

• Risk management reward: Where a business has a better than industry-average track record a degree of self-insurance may achieve worthwhile savings. Also, where self-insurance is not permitted and there is no tax deductibility, a captive may achieve this latter end.
• Investment incentives: A captive and its parent receive the investment income from premium paid. There may be tax efficiencies in respect of such income.• Access to reinsurance: Direct access to the international reinsurance market is available to a captive, with the resulting benefits of cost and coverage.• Unrelated business benefits: A captive is able to operate as a separate profit centre, generating profits from unrelated third party business. However, underwriting losses are possible, and professional input is essential.
• Tax benefits: While it is business requirements and advantages which normally prompt captive formation, legitimate advantages may be available. Onshore consultation with tax experts is necessary.
• Bureaucratic efficiencies: Labuan offers a sensible and workable regulatory regime, enhanced investment opportunities, and freedom of movement of funds, subject, of course, to anti-money-laundering codes and requirements.

Roger Miller, ZI Labuan Trust Company Sdn Bhd.