Captives

Document description

This paper looks at captives from a U.K. perspective. It is now common for major companies to have a captive insurance subsidiary and further expansion of the captives’ activities are anticipated in the next few years. Section 2 considers: What Is a Captive?; and concludes that a captive is part of the overall risk management process by being the special purpose financial vehicle to provide the funding and risk servicing mechanism for the risk management process. In Section 3, the reasons for forming a captive are considered. Real cost benefits may accrue to a company as a result of having a captive through improved risk management, access to the reinsurance market, saving on the direct insurer's commission and expenses and investment income on the insurance funds. A further important aspect is that the captive can assist in providing coverage in problem areas that may otherwise be very difficult to place in the direct insurance market. Tax advantages are not considered to be a significant reason following recent U.K. legislation. Section 4 considers the management of a captive. It is important to ensure that matters are so arranged as to avoid unnecessary tax penalties. A captive, either through its own staff or through a professional management services company, requires the same services as a conventional insurance company. Tax matters are considered in more detail in Section 5. An essential factor is to ensure premiums are deductible for U.K. tax purposes. Many captives are established overseas and the Controlled Foreign Companies legislation is described together with brief notes on tax rules in the more popular locations for captives. Section 6 looks at factors to consider in choosing a domicile. The first choice to be made is whether to establish the captive onshore or offshore. Factors to take account of when building a profile of a captive location are set out. Involvement of a direct insurer as a fronting company is considered in Section 7. In some circumstances this is essential. The problem of security for the direct insurer is considered.