The high cost of insurance and lack of control over claims processing are common frustrations experienced by insurance consumers. A captive insurance company and a segregated-cell captive program are creative approaches to solving insurance-cost and claim-control concerns.
Captives have been a recognized method of providing cost-effective insurance coverage for more than 40 years. These solutions work by primarily insuring the risks of policy owners and related business entities. As a result of the popularity of the captive concept, the number of states adopting captive insurance company legislation has increased dramatically in recent years.
While Vermont continues to be the most popular stateside domicile, many other states and the traditional offshore domiciles of Bermuda and Grand Cayman are creating a very competitive marketplace.
Who should consider captive insurance?
Companies and trade associations with members that historically have excellent claims experience are good candidates for captive insurance. That's because their traditional insurance premiums are funding the claims of customers with poor claims experience, as well as the insurance company's overhead and return-on-investment goals.
Captive programs provide flexibility. Policy owners have some control in determining coverage, who is insured, stabilized pricing over the long term, claims handling and settlement, and selection of defense counsel. Additionally, premiums paid to a captive program are tax-deductible business expenses, just like premiums paid to traditional insurance companies, as long as there has been a shifting of risk and an assumption of risk. These requirements are met when the captive insurance program insures a number of individuals and entities.
However, a captive insurance program isn't the right answer for everyone. Successful captives limit participation to persons and entities that have excellent claims experience and adhere to comprehensive risk-management programs.
Captives formed as offshore entities are subject to United States taxes if the captive is classified as a controlled foreign corporation. If it is not, profits are subject to U.S. taxes only when the profits are distributed to owners in the form of dividends or return of premium, or upon sale of an owner's interest in the captive.
Required capitalization is a function of the premium written, the risks insured, the amount of coverage provided and the actuarially anticipated claims experience. Preferred premium to capital surplus ratios usually range from 3:1 to 5:1.
In all events, minimum capitalization typically starts at $250,000. Capitalization can usually be funded by cash infusions (paid up front or over a reasonable pay-in schedule), irrevocable letters of credit or a combination of both.
Keys to a successful program
A successful captive program is comprised of many elements.
* Long-term commitment to the success of the captive (minimum of five years)
* Design of a sound insurance program with appropriate deductibles, stop-loss levels and reinsurance
* Commitment to sound risk-management programs
* Careful selection of insured parties and insured risks
* Close attention to handling of claims
* Selection of competent advisors and legal counsel
The timeframe for setting up a captive program varies by jurisdiction. As a general rule, once the captive insurance company application is complete (including any required actuarial study and coverage documents), it will take 30 to 60 days to obtain the captive insurance company license from the domicile's regulatory authorities.
A properly formed captive insurance program that is well-capitalized and well-managed will provide its insured with predictable insurance coverage at reasonable, stable rates through insurance market cycles, while providing the insured with a greater voice in the insurance process. The bottom line is that a well-run captive insurance program saves money while increasing control over claims handling.
Robert W. Stocker II is a member in Dickinson Wright's Lansing office. He has practiced law for more than 37 years and specializes in the areas of corporate, gaming, insurance and securities. For additional information, visit www.dickinsonwright.com.