Chambers Global: "The Insurance Group advises primarily on the set up and ongoing operation of Cayman-domiciled captive insurance companies working with captive owners, onshore law firms, brokers and captive insurance managers. The group has particular expertise in relation to healthcare captives and the use of segregated portfolio companies in the insurance context. The profile of the Insurance Group has continued to grow over the past 12 months..."
What is a Captive?
A captive is an insurance company that is wholly-owned and controlled by the person or persons that it writes insurance for. In its simplest form, it is an insurance company set up by a corporate group to write insurance only for the companies in that corporate group. Another way to think of a captive is as a funded self insurance vehicle. Most captives are formed in offshore jurisdictions, like the Cayman Islands, or in a number of US states that have enacted specific insurance legislation suitable for captives.
How Can We Assist?
Solomon Harris has a long-established captive insurance practice and has consequently seen most issues that face offshore captives and their owners. Our work for captives includes:
- preparing the constitutional documents.
- preparing or reviewing shareholders agreements, subscription agreements and participation agreements.
- advising on reinsurance agreements.
- reviewing letters of credit.
- assisting with group financing arrangements that impact the captive.
- reviewing captive management agreements.
- advising on loss portfolio transfers and commutation arrangements.
- establishing segregated portfolio companies and converting existing captives into segregated portfolio companies.
- establishing portfolio insurance companies.
- advising on mergers by statutory amalgamation and scheme of arrangement.
- advising on the inbound and outbound redomestication of captives.
- attending board meetings and shareholder meetings as Cayman legal advisor.
Why have a Captive?
There are a number of reasons to have a captive although not all of them will apply to all circumstances:-
- A captive can provide coverage that may, from time to time, be unavailable in the commercial markets or only available at a prohibitively high cost.
- A captive may achieve cost reductions because the insured business is no longer contributing towards the not insubstantial commercial insurance company overhead.
- A captive assists in building a more robust approach to risk management because claims are being self-funded.
- An insured business that has a better loss history than the industry average should achieve lower premiums through a captive.
- A captive offers more flexibility with premium payments and the ability to generate investment income from unearned premiums.
- A captive offers direct access to open market reinsurers which can be less expensive than conventional commercial insurance.
- Over time the activities of the captive can be expanded to include third party business (e.g. community physicians or joint venture partners).
- In the case of “for profit” enterprises there is the potential to minimise or defer tax through a properly structured and adequately capitalised captive.
Why have a Cayman Captive?
Cayman offers a number of important advantages to those considering establishing their captive here. They include:-
- A solid track record. The first Cayman captives date back to the early 1970’s (e.g. Harvard Medical School captive formed in 1976). Cayman’s first insurance legislation was passed in 1979.
- The world’s second largest captive domicile having more than 700 captives with total assets in excess of US$50 billion.
- A solid reputation with a stable political and economic environment, strong anti-money laundering legislation and adherence to international standards.
- A sound regulatory regime for captives with a risk-based approach, an accessible regulator and capital requirements that are not prohibitive.
- Innovation. Cell captives, used to segregate pools of assets and liabilities within a single licensee, have been available since 1998.
- Modern companies and insurance legislation appropriate for captives.
- A highly sophisticated, service-driven professional services industry – insurance managers, law firms, audit firms and banks.
- No direct taxation of any sort in the Cayman Islands.
- Easy air access from several US gateways.
Is it feasible for my organization to have a Captive?
Only a feasibility study undertaken by your broker or other consultant will be able to fully determine this. However, your organization may wish to consider exploring this further if most, if not all, of the following apply:-
- Premiums that could be put through the captive would be not less than US$1million per annum.
- Where premiums are below this level, there is still the scope to consider participating in a sponsored cell captive facility which we would be pleased to discuss further if this is of interest.
- Your organization generally has a good claims experience.
- You are looking for certain coverage that is not available or readily available in the commercial market or only available at a cost-prohibitive premium level.
- Your organization has the appetite and commitment to run its own insurance vehicle for the medium to long term (albeit on an out-sourced basis with the assistance of various service providers, in particular a captive manager). A captive is never a short term fix to address the challenges of a hard insurance market cycle.
- Your organization has a particular focus on internal risk management.
A commonly held misconception is that a captive is only viable for a Fortune 500 company. Indeed, most Fortune 500 companies will have their own captive. However, for a number of years captives have been accessible to many middle market companies who fit the criteria for self-insurance.