What are the benefits of a owning a Captive Insurance Company?
ATLAS works with brokers, accountants, tax advisers and independent consultants to determine the most effective way for a captive to participate in the parent company's insurance program. Some of the benefits of this participation are as follows:
- Reduction in Costs / Profit Center. The typical insurance company has an expense ratio of 25%-30%. For a captive writing the same policies, the expense ratio is less than 5%, although if policy fronting and claims handling services are required from an onshore insurer, the cost base increases proportionately. In addition to the cost savings, underwriting profits that would otherwise have been earned by an external insurer, can now be earned by a subsidiary company. ATLAS will prepare financial projections at the outset on an engagement that will show potential savings and income.
- Long Term Stability. Owning a captive insurance company, or participating in a SPC or rent-a-captive arrangement gives not only added flexibility in program design, but also creates long-term stability in both cover and costing. Captive premiums are calculated on a cost plus basis, and are not influenced by the cycles in the insurance market, which can be fickle in nature.
- Availability of Cover. When market covers are withdrawn by the conventional insurers, or when exclusion provisions are enforced, there is no reason why the captive should follow these changes. Policy wording and coverage can be tailor-made to suit the insured.
- Access to Reinsurance Markets. Reinsurance markets can often be less expensive, more flexible, and more innovative than the direct markets. Long term deals are more popular with reinsurance than the direct market.
- Improved Risk Management. The financial performance of the captive arrangement, when consolidated with the parent company's numbers, may have a positive influence on the performance of the group. Having a direct interest in an insurance vehicle may raise awareness of insurance issues and heighten risk management. Often risk control and risk reduction procedures will be employed to improve health and safety practices, which are implemented with a view to reducing the long-term cost of risk.
- Cash Flow Benefits. A captive will earn investment income on the premiums, which would not otherwise be available when paid to a direct insurer. For long-term business (i.e., employer's liability, environmental, motor third party, etc.), this investment income can accumulate to an amount equal to, or greater than, the original premium. Typical captive investments are in cash deposits, company and government bonds, and equity investment funds.
- Tax Deferral and Reduction. We do not purport to give tax advice and you should consult tax experts in your home jurisdiction for advice on tax issues. It is our understanding that in certain instances a US parent company may be able to achieve tax deduction for both the premium paid and the loss reserves established. Tax may only be due when claims payments, or dividends, are remitted back to the parent company. To achieve such tax deferral there must be risk shifting and risk distribution - i.e., arms length risk transfer, and the possibility of loss spread across a number of insured entities. It may also be possible for US companies to make a 953 (d) election for their captive to be a US tax paying entity. Taking this election eliminates F.E.T. as a cost of participation. If the premium is less than $1.2m, an 831(b) election will exempt underwriting profits from tax.