Captive Insurance – An Introduction

Three types of insurance

This post attempts to explain what captive insurance is, why it can be a good idea, and how we at Frontière can help.

Self Insurance

Each month, instead of paying a premium to an insurer, some people pay a fixed amount into a special savings account reserved for a specific risk event.  For example a client puts $30 per month into a savings account to provide for the risk that a camera worth $1000 is lost or damaged.   If after a number of years, the camera is still fine, the savings account can be raided to buy a new camera, or a better lens.  If the camera is stolen, the contents of the savings account can be used to replace the camera or be applied to something else in an emergency.

This example quickly highlights the benefits of self insurance:

  • Payments are never lost, in the event of a zero claims
  • Reserves are built up over time
  • Reserves can be applied to anything
  • Total cost – benefit efficiency.

What this example also highlights are the pitfalls of self insurance:

  • There is uncovered risk until the reserves are big enough to cover the risk
  • Insurance is a tax-deductible expense, but this form of self insurance is not.

Captive Insurance

Captive Insurance achieves the above benefits without the pitfalls.  Granted, the cost-benefit equation is not as perfect, as the captive provider charges fees for the service.  But this is outweighed by the tax deduction of the premiums paid, and the addition of expert support, plus the ability to take out ‘real’ insurance on risks that exceed the value of the reserves, at least in the beginning of this process.

A Captive Insurance provider is a licensed insurance company that provides tailored insurance for specific clients to cover specific risks, and who retains the net earned premiums for the future benefit of the client.

Net earned premiums are those that have been paid by the client, but remain with the insurer after costs, claims, taxes and expiry of that insurance period.  With traditional insurance, the client occasionally sees a tiny part of this in the form of a no claims bonus.  With Captive Insurance the client keeps this.

Net Earned Premiums go into the capital reserve account for that specific risk, and can be used to provide more insurance cover, a cash reserve, or can be distributed back to the client.  Distributions may be taxable in the hands of the client depending on how they are distributed and the tax laws of the client’s country.

At Frontière Ré (full name: Frontière Réassurances Ltd PCC) we link up with the Captive Insurance Provider in whatever country they are based.  We offer a mirror image insurance contract, to cover say 90% of the risk to the Captive Provider, and create a protected cell, in Mauritius, much like a savings account, for the flow of about 90% of the premiums.

The benefits to using Frontière Ré are that profits earned are taxed at net 3%, are outside the client’s county of residence, and can be held in any currency.  They are also off the client’s balance sheet and can be used or borrowed by the client during lean times.  Profits can also be distributed as dividends or as capital gains.

Please note that this is only an introduction to the concept of Captive Insurance and many details have been omitted to keep it as simple as possible..

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Categories: Insurance

One Comment on “Captive Insurance – An Introduction”

  1. October 9, 2012 at 12:17 pm #

    Great news on Captive Insurance. It is without doubt amongst
    the most useful that I’ve checked out in a very long time.
    We’ve been seeking this info!

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