Captives
Captives are companies designed to formalize self insurance and qualify for an accounting method which allows reserves to be set aside on a tax deferred basis. Companies or groups considering a captive should review the steps outlined below and then call KIBL for advice.
Reasons to form a captive:
- Reduced reliance on Commercial Insurance
- Reduction in Costs of Risk Management
- Stabilization of Pricing
- Provision of Cover, where unavailable
- Access to Reinsurance Markets
- Improved Cash Flow Benefits
- Ability to Customize Insurance Programs
- Formalize Allocation of Deductibles for SIR within a corporation
- Underwriting Advantages: Specialized
- Increased Control of Claims
- Improved management information
- Consolidation into Parent’s financials
- Tax Considerations
Creation of a Profit Center
- offer insurance to unrelated parties, customers
- positioning of Risk Management in Overall Business Objectives
- sometimes partially driven by tax advantages
- ability to direct Investment Options of captive funds
- may be other business reasons, illustrate loss control results
Tax Advantages
- tax-favoured accumulation of underwriting and investment income
- deductibility of premiums or incurred losses
- premium tax reduced
Possible Drawbacks
Administration
- increased involvement in claims, loss control and underwriting
- need for special expertise
- could complicate potential for merger/acquisition
- regulatory dealings, filing, tax, and domicile issues
Finance
- capital commitment
- increased frictional costs at inception
- volatility of reinsurance market
- risk of run-off: difficulty in exit
Captive Consideration: Initial Steps
Conduct introductory discussions with your broker, or Knox, and other advisors including regulators. Research other captive activity in your industry; talk to those risk managers.
Conducting a feasibility study includes:
- risk profile, financial condition and insurance issues
- 5 year financial pro forma business plan
- legal and tax research
- actuarial projections
- domicile options
- a comparison of captive types and other ART options
After completion of the study you may want to consider sharing costs, but not risk, with others. If so, you should consider:
The Knox Solution
Knox intends to form an agency captive domiciled in Barbados. The domicile has been chosen because of the tax treaty in place with Canada.
Knox will offer protected cells within the captive to corporations who wish to form a captive but do not wish to pay the fees associated with maintaining their own pure captive.
Knox is working with certain groups and associations to provide advice on forming group or association captives. Knox will work and provide advice on captive implementation using the following model:
Captive Implementation/Formation Steps
- Service Provider Selection
- Organization Documents Preparation
- Captive Name Selection and Registration
- Incorporation
- Organizational Meeting and Opening of Bank Accounts
- Captive Business Plan Preparation
- Captive Pro Forma Financial Statement Preparation
- Meeting with Captive Domicile Regulators
- Captive Application Package Filing
- Capitalization
- Application Review and Licensing
- Begin Operation
This process can be done on a fee for service basis for companies which wish to provide their own captive services or Knox is prepared to administer third party service providers.
Costs
Service Provider:
Captive Manager: $25,000 to $150,000
Actuary: $5,000 to $50,000
Auditor: $10,000 to $50,000
Bank (Letter of Credit): 25 basis points to 50 basis points
Investment Manager: 30 basis points to 50 basis points
Attorney: $250 per hour to $500 per hour
TPA: per claim charge, varies based on risk insured
Consultants: project specific
Please contact Bruce Knox, President of KIBL, for information concerning captives.
