What is offshore captive insurance?

Have you ever fantasized about owning, or doing business with, an offshore captive? Picture enjoying the sunset with that special someone beside you. Yachts abound, balmy breezes, a tropical island beach and a cool, refreshing drink in your hand, not a care in the world…

Take it several steps further and visualize that your business is running smoothly because you now enjoy the freedom to select your own service providers to administer your workers compensation plan. Your advisors are highly qualified experts who have guided you toward wise decisions in obtaining cost-effective protection along with excellent services and support for your staffing firm. Rather than having one carrier servicing all aspects of your program, you now have the control of choice.

Or, perhaps when your mind wanders about offshore captives, the scenario is a bit more pessimistic, bordering on nightmarish: Those scary thoughts about the stability of an offshore captive – that is akin to “The Shifting Interests Insurance Company” – Leave you feeling a bit, well, nervous! Perhaps you entertain thoughts of wicked drug lords living it up in decadent luxury, living side-by-side with ousted European Royalty and dictators. A dreadful excitement, isn’t it?

Knowledge is always superior to fantasy and fear, so let’s gather the body of facts to enjoy a well-informed fantasy… welcome to the wonderful world of offshore captives!

A few facts about offshore captives

Captives are more complex than the conventional insurance marketplace and should neither be underestimated nor overestimated – they should be understood and definitely explored.

  • The captive insurance industry has been around since the 1920s and now, enjoying a much higher profile, it is recognized by the international financial and business world as a significant player in the insurance marketplace.
  • A captive insurance company establishes a separate insurance company for the sole purpose of reinsuring a portion of the risk. The reinsured portion could cover the first layer of risk, similar to a deductible program of a certain amount of money, for example, $250,000 per occurrence. The reinsured portion could also provide coverage for an upper layer of risk.
  • Several U.S. States have now introduced favorable legislation to promote the growth of domestic captives, which are typically formed to finance the exposure to risk.
  • Though the number of insurance captives is rising, most of them still reside in Bermuda, Cayman and Barbados, and they are incorporated in offshore financial centers, which offer many advantages, such as: less restrictive insurance regulations; freedom from exchange controls; low, or sometimes zero, taxation rates; and specialized professional infrastructures.

What kind of captive should you consider for your particular firm?

  • A Single Parent Captive is a wholly owned or controlled company that only insures or reinsures the risks of its non-insurance parent. This offers the most flexibility but takes a substantial amount of capital to incorporate.
  • An Association Captive is an insurance company that is owned by a group of companies to insure or reinsure the risk of its shareholders. This type of captive shares risk with other members, so it is important to do your due diligence in the selection of members. Remember their risk becomes your risk, so be very careful!
  • An Agency Captive is an insurance company that is owned by insurance brokers who reinsure a portion of the insurance they sell through their own captive insurance company.
  • Rent-A-Captive is a captive which provides facilities to others for a fee. This can be set up with protected cells so there are firewalls between policyholders. This captive provides the opportunity to “test drive” the captive concept prior to ownership.

An interesting note:

While most offshore captives are established as reinsurance companies, a domestic insurer writes the primary policy for the risks and then cedes back part of the risk to the captive. Under this arrangement, the “admitted” carrier is known as the “fronting” company.

Remember, captives are long-term commitments in an ever-changing insurance marketplace that offer the well-educated, well-informed, and truly entrepreneurial businessperson benefits that could outweigh any negatives.

If you are considering a captive as your primary risk financing vehicle, do your research!

Bob Barrow is the President of Barrow Group, LLC. Barrow Group, LLC is a specialist in the captive industry. He can be contacted at 800-873-4798, or by email at bbarrow@barrowgroup.com.

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