Captives made their debut in the U.S. in the late 1950s. States regulated them like insurance companies so establishing and operating a captive in the U.S. was very expensive. The few businesses that used captives created them offshore (in a foreign country) to save money. The number of captives increased substantially in the 1980s, when product liability, medical malpractice, and other liability coverages became difficult or impossible to obtain. Nowadays, businesses use captives in hard and soft markets to obtain a wide range of property/casualty coverages. According to the NAIC, the industries with the most captives are finance, real estate, construction, and manufacturing.
Reasons to Create a Captive
Many Fortune 500 companies have established a captive. Here are some reasons why a company might create one:
To obtain better control over its cash flowTo secure a type of coverage that isn’t available in the marketplaceTo obtain broader coverage than insurers will provideTo save money on risk management costsTo obtain stable insurance pricing
What’s a Domicile?
A captive is subject to the rules and regulations of its domicile, the place from which it operates. A U.S. company may domicile its captive offshore or in one of 39 states or territories in the U.S. that have passed captive legislation. Common offshore domiciles include Bermuda, the Cayman Islands, Barbados, and Ireland. Some U.S. states have passed captive-friendly laws to encourage captives to form there. Examples are Vermont, Utah, Delaware, Hawaii, and North Carolina. Choosing a Domicile When a business opts to create a captive, it must choose its domicile carefully. Here are some factors to consider:
Types of Captives
Most captives created by businesses are single-parent (also called pure) captives, which are owned by one company. Other types of captives include group captives, association captives, and rent-a-captives. A group captive is created by a collection of companies that operate similar businesses and have similar loss exposures. An association captive is established by a trade or professional association or industry group to insure similar types of businesses. A micro-captive is a small captive with an annual written premium of $2.3 million or less. The annual monetary cap is set by the U.S. Internal Revenue Service. Micro-captives have some tax advantages. They are taxed under IRS code 831 and pay tax only on the income they generate from investments. They do not pay tax on underwriting income. A rent-a-captive may be used by non-owner companies for a fee. The companies gain access to the captive without making a capital commitment. The benefits of using a rent-a-captive include lower insurance costs, stable premiums, and better control over a company’s insurance program.
How to Create a Captive
There are five basic steps to creating a captive according to Captive.com, a website dedicated to captives and the professionals that operate them.
