Are you ready to own your insurance?
Captive insurance is not right for every business. However, if you are an owner with a good safety history and safe policies and procedures in place, owning your own insurance company means you no longer have to settle for letting your premium dollars benefit the insurance company and not you.
Q. Why join a Captive Insurance Company?
A. The insurance marketplace has historically endured “hard and soft” market cycles where premiums go up and down with little relating to your actual loss experience. By pooling your resources and becoming an owner of an insurance company, these swings can be eliminated, making insurance costs no only more predictable, but actually profitable. This is achieved through unbundled services resulting in lower fixed costs and the ability to retain investment income.
Q. Am I putting my company in financial risk by entering a captive?
A. If it is done properly, you are not. If all you were doing is paying a premium into a fund in a bank and hoping your losses didn’t exceed the fund, then yes it would be very risky. If, however, the program is structured properly, using a licensed admitted insurance company to act as the fronting company who actually issues your policy, and if we use a financially strong reinsurance company to insure the catastrophic losses, the risk is minimal. Under this concept, the assumption of risk occurs only in the smaller, predictable layer. By cutting fixed costs and earning investment income, the financial risk is reduced, and the bottom line is enhanced.
Q. Besides the premium, what will be the contribution to capital and surplus?
A. Typically, each member contributes $36,000 as capitalization. $100 is for a common share of stock and $35,900 is redeemable preference shares. Your company will earn investment income on the $35,900 for the entire period of time they are in the captive. Each member also posts a letter of credit to collateralize any possible assessment in the program, as well as to provide additional capital in the company. The amount of the letter of credit is specified in your proposal.
Q. If you withdraw, how and when will capital and surplus contribution be returned?
A. Capital and surplus are returned when all policy years for which your company participated are closed.
Q. Assuming the captive is profitable, will there be dividends? When? Will there be some relationship between loss experience and dividends?
A. Those members who have profits in their loss funds, will have these profits returned to them, along with the investment income earned for that policy period. The captive strives to close the currently policy period three years after the end of a policy year. Members that have losses exceeding their loss funds, will not have any profits, and therefore, will not receive dividends for that underwriting year.
Q. Will profitability (if any) result in a decrease in premium rather than dividends?
A. Just like in the conventional insurance marketplace, premiums are loss sensitive. Funding for losses is set by the captive’s independent actuary, Pinnacle Actuarial Services. Over a period of time, three to five years, the captive pay-in premium should decrease if the losses are less than the amount being funded for. Conversely, if losses exceed funding, the premium will need to be increased. If a dividend is declared by the Board of Directors, it may be used to offset premium in the year it is declared, or returned to the shareholder. It is the Board’s decision, which you are a member of as part of the captive!
Q. Will the captive be set up as an entity that will pay U.S. Income taxes? If not, will there be dividends adequate to pay the insured’s sub-part F income tax liability?
A. No. The captive will be a non-U.S. corporation. As a result of the 1986 Tax Act, a company is construed to have received the dividend whether it is taken or not. Each shareholder is responsible for his or her own tax responsibilities.
Q. What loss control and claims handing service enhancements are provided by the captive that are not normally available in the traditional insurance marketplace?
A. The captive has a specialized loss control program administered by the Commercial Risk Services, Inc. headquartered in Tulsa, OK. Special handling instructions for each member’s claims, which are handled by the claims administrator, Gallagher Bassett. Murray-Wamble can assist in purchasing the services independently on an unbundled basis. This assures each member that the service provider is being evaluated based on the quality of his or her work product. Finally, your company will be invited to attend two risk control workshops each year, which allows for an exchange of information between members that is not possible in the conventional market.
Q. How long must the insured remain in the captive to participate in profitability?
A. You are committed to the captive for only one policy period. Profits are based upon the end of the policy period you are a member of. We do recommend when you join, you make a commitment for three year, to give you an opportunity to learn and understand all the workings of the captive.
Q. Is there any potential for assessment if the underwriting results turn out not as well as planned?
A. We are able to quantify your company’s exposure. Any assessment is typically driven by your own company’s loss experience. We will be able to identify the amount of a member’s maximum assessment up front. There is a defined payment schedule for any assessment.
Q. Who is on the Board of the Captive?
A. Each member of the captive is also on the Board of Directors. The Board has three committees which consist of risk control, finance and underwriting. The captive asks that each member serve on one of the committees to become more familiar with the working of the captive. All service providers serve at the discretion of the Board of Directors.
Q. Who provides each service? Captive management, auditing, investment advisor, legal, claims, loss control? If all provided by one firm either directly or indirectly, there is cause for concern.
- Accounting Management: Kensington Management Group, Ltd.,Cayman Island, Ltd.
- Auditing Services: Price Waterhouse Coopers
- Investment Management: Royal Bank of Canada
- Legal (off shore): Maples & Calder
- Legal (on shore): McDermott, Will & Emery
- Policy Issuance: The Hartford
- Claims Administration: Gallagher Bassett
- Loss Control: Commercial Risk Services, Inc. & Others
- Captive Resources: Retained by the Board of Directors as consultant for all activities.
- Murray-Wamble: Performs day-to-day brokerage duties.
Q. How often will financial statements be prepared?
A. Semi-annual reports will be prepared and available for review by all members.
Q. What is the legal formation of the captive?
A. The captive is a corporation domiciled in the Cayman Islands.
Q. Is this a rent-a-captive?
A. This is not a rent-a-captive arrangement. Unlike many other group captives, which are controlled and managed by brokers, and/or agents, this is a captive owned by shareholders/members, directed by the shareholders/members.
Q. What coverages are underwritten in the program?
A. The captive reinsures the Policy Issuing Carrier for Automobile Liability and Physical Damage, Workers’ Compensation, and General Liability including Products and Completed Operations. Property coverage is available through a separate captive called Everest Property Insurance Company (EPIC.)
Q. What is the historical experience of a group captive such as this as it relates to the conventional market?
A. Historically, members create a 30-40% return on investment, instead of the major expense of standard annual premiums.