January 2023 - Every organization practices some form of self insurance. Some elect to pay losses to a certain level and self insure the deductible; some operate in industry sectors where historical claims are high and commercial insurers charge prohibitive rates or elect not to underwrite the activities; some companies may not be aware of coverage that is available and others may not properly assess their operating risks and may not consider commercial coverage, so end up self insuring by default.
Captive insurance companies are a form of self insurance. Any organization with a good risk management programme that feels that its insurance premiums are too high, may benefit from setting up a captive. Including a captive as part of your risk management strategy may provide more benefits than self insurance. While it was once part of the risk management strategy of only multinational companies, it has become a risk management tool used by the middle market as well.
To determine whether a captive would benefit you, a feasibility study should be performed to assess the risks your business faces and potential lines of business that might be provided by a captive. For the feasibility study to be conducted, it will be necessary to provide information about your loss history, premium levels and current coverage details. The feasibility study will entail a review of the size and scope of risks, projecting these risks over a long period and should include the operations of the proposed captive, including premium rates, capitalization requirements based on the risks covered and profit/loss projections. The feasibility study should be reviewed with your advisors.
If the analysis supports establishment of a captive, tax advice should be obtained to ensure the captive is structured in the most tax advantageous manner and to confirm the applicable tax treatment required for both the captive and its shareholders. In reviewing capitalization requirements, decisions will need to be made about the source, mechanism and level of funding required. Decisions will need to be made about the domicile and service providers; including insurance manager, legal counsel, actuary (if required), auditor and bank. This will also be the time to evaluate the corporate structure, review constitutional documents and determine ownership structure and composition of the Board of Directors. Steps should also be taken to obtain options for possible fronting and reinsurance options.
The process of obtaining an insurer’s licence will require an application to be submitted to the Financial Services Commission (“Commission”). The application will require a detailed business plan, compliance procedures, copies of agreements, confirmations from service providers, as well as due diligence on the prospective owners and directors. There is no statutory requirement for directors of a captive to be resident in the BVI.
Your business plan must outline the feasibility of the captive, set out what classes of business will be underwritten and the source of that business, contain technical details about the types of policies, underwriting, claims and accounting processes, proposed investment strategy, dividend policies and include financial projections for the first five years of operations. The insurance manager will also be able to advise on the requirements for regulatory compliance.
The captive will need to be incorporated and capitalized. A bank account will need to be opened for the company. There are no statutory requirements for an account to be maintained in the BVI, but this can be arranged if required.
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