If you are a business owner with a good safety history and safe policies and procedures in place Captive Insurance may be for you. 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?
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?
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?
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?
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?
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
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
Q. What loss control and claims handing service enhancements are provided by the captive that
are not normally available in the traditional insurance marketplace?
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
Q. How long must the insured remain in the captive to participate in profitability?
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
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?
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.
Q. How often will financial statements be prepared?
Semi-annual reports will be prepared and available for review by all
Q. What is
the legal formation of the captive?
The captive is a corporation domiciled in the Cayman Islands.
Q. Is this a rent-a-captive?
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
Q. What coverages are underwritten in the program?
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
Historically, members create a 30-40% return on investment, instead
of the major expense of standard annual premiums.