Introduction
Captive insurers are insurers who are owned in part or in full by companies in the business of insurance. Captive insurers have an aim of protecting the interest of original beneficiaries in various insurance companies. They also get involved in ensuring that members have good operations in order to protect the beneficiaries of insurance. They also get involved in ensuring underwriting investments and management is well undertaken by companies that offer insurance services. In most countries captive insurance has not been well defined but they use reinsurance as a way of managing risk. The idea of captive insurance is the idea of managing and spreading risk, lowering the costs of insurance, ensuring a flexible service, stabilizing the price of services and improving investment portfolios. They are used by insurance companies and re-insurers to minimize their risk and increase returns.
Every insurance company has a limit to the risk that they will undertake in relation to policies taken. It will be very difficult and very expensive for insurance companies to rely entirely on their efforts to reduce risk and liability on policies taken. This requires an insurer who will reduce this risk and protect the general public from collapse of insurance firms, protect insurance companies from huge claims that may push the firm to go under. Therefore when a company has accepted risk from clients they arrange with captive insurers to insure some amount in order to reduce the risk. Captive insurers offer alternative methods of reducing risk by a single insurance company. And this is normally described as transferring risk.
These companies are formed and owned by insurance companies therefore they may be stationed and operated within insurance companies. This is because the insurance companies are the main beneficiaries and their main purpose is to spread risks and assist in increasing income from diversified sources.
In the Middle East there are many captive insurers however Bahrain is one of the largest captive insurance centre because they have many such insurance companies based in this country. Captive insurance in Bahrain is well defined and in this country they have a number of services that are associated with captive insurance.
There are various types of captive insurance that are available and used. They include; rental captives, diversified captives, associated captives and pure captives.
- Rental captives are formed by insurers to provide facilities to some other companies at a fee for the purpose of making income. These kinds of captives are normally used by other insurance entities who don’t find it necessary to form their own captives. It may not be formed by insurance firms but it is owned by people who are just renting out but they do not actually render services to related companies.
- Composite captives are another form of captive which is formed for the purpose of offering life and general business services to members and non-members.
- Association captives are one of the largest forms of captives because it is owned by a group of associates or insurance companies offering services to them with the aim of reducing their risks within specific trends. Associate captives are common in the industry because it is the best in sharing risks among industry players.
- Pure captives – some insurance companies may opt to form their own captives to provide services to themselves and associates. These are usually owned by single parent companies and the captives become 100% owned subsidiaries.
- Diversified captives – This form of captive is usually formed by companies and associates to write risks of unrelated business.
- Health care captive – this form of captive is formed and owned by healthy offering institutions and they offer services to themselves and affiliates
- Agency captive – Agency captives are captives formed by a group of insurance agents offering services to some insurance business companies as well as the business they operate.
Insurance companies establish captives for the sole purpose of sharing and spreading risks associated with their business. A company on their own may not have the ability to caution against a risk of huge amounts of claims that may arise due to unforeseen factors. Placing risk in a group ensures that the risk of many claims is reduced by ensuring there is a defender during the time of need. This is because captive insurance ensures that there is a reduced insurance policy with the parent company or companies and at the end of the day the amount of claim payments paid out at some point is cautioned. They act as a source spreading risks among insurance companies. Often the management of a captive handles several risk assets thus spreading the risk. When this occurs the captive insurer ensures that there is always a flow of liquidity that will help them assist the other companies i.e. the owners of the subsidiary or users of the service are cautioned.
Pros and Cons of captive insurers
There are a number of advantages and disadvantages of captive insurance and they include underwriting, profit from insurance or insuring companies, a diversified investment income, a wide market for both re-insurance and insurance and the ability to be able to separate insurance components such as life, motor-vehicle, and many others. It also enjoys the facility of professional management because the captive insurance being formed to caution risk will try to hire the best person in the market. If it is a group property, it will mean that the companies will hire the best human resource.
When we talk of the company having a wide diversified investment income we mean that being formed for the purpose of spreading risk they will invest in a diversified portfolio where systematic and unsystematic risk associated with various stocks are minimized and ensuring a possible predictable rate of return for investment. The access to a wide market means that they will offer re-insurance services as well as insurance services to members and non-members.
Apart from the stated pros, they have their own disadvantages such as tax implications, underwriting greater risk. Tax charged for the services may be higher if the tax law does not consider the case of double taxation e.g. a service may be taxed at one point and at the same time tax when under captive services. Therefore before any company forming this form of service should consider the impact of tax on the profits, capital and other form of payment from the company if it leads to double taxation then it will be of no use to have them.
6) Captive insurers exist in Middle East and mostly they are situated in Bahrain which is known as a captive insurance centre not only in Middle East but in the world. There are a number of requirements for establishing captive insurance.
To begin with in order to form this form of business a thorough visibility study should be formed to ascertained viability of the business. Secondly, one must obtain necessary approval from the insurance company involved or insurance company that will use the services. What follows is the preparation of necessary documents that will ensure a legal entity is established. The documents that are necessary is the articles of association, memorandum of association, this documents will be filed to the regulatory board with a list of nominated directors who will serve in the formed captive insurance company. A license will be applied once this document has been approved by the regulatory board. The regulatory board will issue the license to operate the business. What follows is choosing the form of capital that will be used in running the operations of the company. After it has been formed, the company will be operational.
Work cited
Business week (2006); captive insurance: Alternative Risk Transfer takes over the world. 2009. Web.
Ensurion (2007); Captive insurance services; Ensurion W.L.L. 2009. Web.
Gower, L.C.B. and Davies, P.L. (2006) Principles of Modern Company Law Sweet and Maxwell.
Slorach, J.S. and Ellis, J. (2006) Business Law LPC Guide Oxford OUP.