There was a time when captive insurance was the preserve of large international organisations. However, innovation in the sector has meant that this is now more accessible for small to medium-sized enterprises.

A captive, in its purest form, is a company set up by its owners primarily to insure the risks of its parent and/or subsidiaries. This can offer several advantages in comparison with insuring through the commercial market:

  • The insuring of unusual or catastrophic risks or multiple small risks

  • Avoid paying large overheads and profit margins

  • Premiums relate to the insured's previous claims record

  • Direct access to the wholesale reinsurance market

  • Benefit from the investment return on retained premiums

  • The retention within the group of the excess of net premiums over claims

  • Taxation efficiencies the payment of insurance premium is deductible in arriving at profits and receipt is at the group's offshore captive

  • Improved risk management and understanding of the cost of risk

In the past, some small to medium sized firms have found that the benefits of a captive, given the likely volume of business, can be outweighed by the start-up and on-going costs.

Participating in a rent-a-captive scheme offers the advantage of sharing such expenses.

Firms are cautious about proceeding in such a manner using a conventional company, as all of the assets and liabilities are linked and therefore there is a risk that the failure of one insurance programme will lead to the loss of assets relating to another.

To address this, Guernsey pioneered the Protected Cell Company (PCC) a company made up of a core and individual cells, where the legal segregation ensures that no claim against one cell will be covered by the funds furnished by another.

Guernsey has now also introduced the innovative Incorporated Cell Company (ICC). An ICC, like a PCC, has cells but they are separately incorporated and distinct legal entities, offering an added layer of protection in the separation of assets and liabilities.

The use of a third-party cell company rather than a full-blown captive has distinct benefits which for small to medium sized businesses in particular makes captive insurance more viable:

  • Lower Operating Costs Savings from reduced reporting requirements and shared costs

  • Less Management Time Reduction in the amount of executive time required by the cell owner, primarily because attendance is not required at quarterly PCC Board meetings

  • Quicker And Cheaper To Set Up And Exit Setting up and closing down a PCC cell does not require the same legal processes required to incorporate or wind up a company

  • No Minimum Capital There is a need to cover the minimum margin of solvency and the risk gap but this may be less than the £100,000 minimum required for a separate captive

  • Less Tax Using a PCC can avoid being subject to Controlled Foreign Company legislation

Such are the potential benefits of captive insurance for all sizes of company that a client's risk management strategy could be considered somewhat deficient in scope and responsibility if it does not involve the use or at least consideration of some form of captive insurance.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.