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This primer explores the intricacies of captive insurance companies, defined as closely-held entities controlled by their owners to provide insurance or reinsurance for themselves. Key types of captives include Pure, Association Captives, and Risk Retention Groups, among others. The guide also outlines ownership structures, such as Single Parent and Group Captives, and delves into transaction regulations pertaining to direct insurance and reinsurance. Captives serve as crucial components of risk management strategies, providing tailored coverage, financial flexibility, and governance participation for their owners.
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Primer on the Structure and Ownership of Captives John Yonkunas
Captive Defined A closely held insurance company controlled by its owners… ... offering insurance products or reinsurance support to its owners as the principal beneficiaries... ...and the owners-policyholders actively participate in decisions influencing underwriting, operations and investments.
Types of Captives • Pure Single Parent • Related Business Single Parent • Unrelated Business Single Parent • Captive of Insurer • Association Captive • Multi-Owner Captive • Healthcare Captive • Life Insurer Single Parent • Rent-a-Captive • Risk Retention Group • Self Insurance Groups • Reciprocals • Agency Captive • Special Purpose Vehicles • Protected Cell Captive • Producer Owned Insurance Company 3
Categories of Captives • Ownership & Control • Single Parent • Cell Captive • Group/Risk Retention Group • Transaction & Regulation • Direct • Fronted/Reinsurance • Structure • Stock/Mutual • Reciprocal • Domicile • Offshore • Onshore
Single Parent • Insures the risk of the parent and sister companies • Includes predictable exposures & working layer • Offers unusual or uninsurable coverages • Punitive Damage • Terrorism • Business Risks • Assets Controlled by Treasury • Loan-Backs • Commercial Paper • May be highly leveraged and rely on Parent Financial Position
Group • Insures the risk of the members/policyholders • Includes predictable exposures for casualty coverages at low retentions • Does not typically offer unusual or uninsurable coverages • Assets Managed by Investment Manager • Moderately Leveraged • Higher Regulatory Scrutiny • Risk Retention Group – Federally authorized licensed carrier
Cell Captive • Reinsures the risk of cell owner • Includes predictable exposures • No unusual or uninsurable coverages • Assets Controlled by Sponsor/Owner • Ownership/Governance Limited • No Direct Capital – Indirect Capital for “gap” exposure • Legal segregation of assets and liabilities • Entrepreneurial in nature
… direct insurance Premiums Corporation Captive Coverage … reinsurance Premiums Fronting Fee Insurance Company Captive Corporation Reinsurance Coverage Captives are Established to EitherInsure or Reinsure Risk
Carrier Captive Owner/ Policyholder Insurance Reinsurance Excess Excess Excess Agreement Agreement Deductible/SIR Indemnification DED/SIR DED/SIR Agreement Captives as part of an integrated and complex risk financing program 11
Authorization Varies by Type of Captive *Some Non-RRG groups offer direct insurance coverage as a non-admitted foreign carrier.
Structure Category • Stock/Mutual • Stockholders/Members • Board of Directors • Officers • Taxable at Captive level
Structure Category • Reciprocal • Subscribers • Subscriber Advisory Committee • Attorney-in-Fact • Subscriber Savings Accounts - Assigned Surplus • Taxable at Captive and Subscriber levels
Off-Shore Implications • Non-Taxable in U.S. • U.S. Owners may be subject to tax exposure • Exposure to FET and Supplies Lines Tax • Non-Insurable Coverage • Money & Meeting outside the U.S. • Non-Admitted/Foreign Status • Subject to Infrastructures of Domicile
On-Shore Implications • Captive Exposed to U.S. FIT • Exposed to State/Domicile Premium Tax • Money in U.S.; Meetings in Domicile • Subject to Infrastructure of U.S.
