What are Captive Insurance Companies?
Captive Insurance Companies (Captives) offer unparalleled benefits for the companies that use them. They allow a company to obtain insurance coverage that is tailored to its own unique risks, rather than the standard coverages provided in commercial policies. Captives also provide claims handling services that are substantially better than the service provided by commercial insurers.
A “captive” is an entity you own and control which can serve a multitude of strategic purposes. It is:
An actual insurance company allowing for:
- Optimal enterprise risk management
- Lower overall insurance expenses
- Can serve as a profit center
An investment vehicle that is:
- Fully under your control
- Protected from creditors and lawsuits
Your Captive is an Insurance Company
A captive provides expertise, discipline, and a frame of reference to truly understand and manage enterprise risk. A captive allows for creation and acquisition of insurance policies that are not available or cost effective in the commercial market. Your captive allows you to formalize insurance of risks you are currently self-insuring. Some of the insurance coverages, many which can be structured to compliment insurance purchased through the commercial market that may be considered for a prospective captive program include, but will not be limited to:
* Administrative Actions * Loss of Key Employees
* Cyber Liability * Pollution Liability
* Business Interruption * Equipment Breakdown
* Healthcare Expense Insurance * Product Liability and Recall
A vast range of policy types are possible (see more below in Appendix A).
How can a Captive lower overall insurance expense?
Actuarial business analysis may reveal areas where current market-based insurance is not cost-effective. This can allow you to raise deductibles and/or lower maximum claims, while bringing that risk into your captive instead. Where advantageous, you may bring select current policies into your captive and carry the risk there.
A Captive allows you to directly access the reinsurance market
By accessing the reinsurance market, you optimize your risk portfolio by choosing how much risk you wish to carry within the captive, and how much you wish to pass on to the reinsurance market. By “cutting out the middleman” on some policies, significant cost savings may be realized.
Your Captive as an Investment Vehicle
A captive should rapidly build up reserve and surplus funds, which you, as the owner may invest. Quite simply, you transfer funds to your captive by purchasing strategically-designed insurance policies from it.
Your captive will allow you to do the following, and more:
- Invest in securities
- Provide loans
- Acquire assets to lease to parent and/or other companies
While captive investments are subject to investing guidelines and oversight from jurisdictional Department of Insurance, your assets can be protected from creditors.
How can you get funds out of the Captive?
When claims are warranted, you may choose if and when to remove funds in that manner. Otherwise, funds may be distributed as dividends. At end of lifecycle, the captive may end up with funds distributed as long-term capital gains.
What is the history, and how widespread are Captives?
There were 5,745 captives worldwide at the end of 2011, up from 5,587 in 2010, according to an annual Business Insurance survey of captives domiciled. First established in the late 1950s, today, captives are used by over 90% of Fortune 1000 companies as well as privately held businesses. Forty US states now allow domiciling and compete for captive business.
Will this increase my likelihood of being audited?
Properly managed captives do not increase the likelihood of an audit. For operating businesses, the expense shows up on the books simply as a line item.
What are the requirements of a Captive?
Laws, regulations and ethics surrounding proper captive management are established and clearly defined. Several key factors are vital for the success of any captive insurance company. Without these, the captive can be met with regulatory intervention IRS penalties, or worse. The Mesquite Captive team wants you to be well-versed in Captive Insurance, so you have maximum peace of mind in the way your captive is run. Mesquite’s captive design and management team members are highly experienced, recognized for their knowledge and expertise, and extremely conservative. Our clients’ safety and peace of mind is our top concern.
How difficult is it to create and manage a Captive?
Historically, the cost and complexity of captives kept them out of reach of most small to mid-sized companies. Mesquite Captive has changed that. Our turn-key solution makes captive insurance solutions accessible and affordable. Our team delivers full-service support including Legal, Actuarial, Accounting (including tax preparation and audit of the captive), Captive Management (regulatory compliance and insurance services), Reserve & Surplus Management, and overall Program Management.
We focus on our client’s alternative risk management requirements centered on (1) captive assessment, (2) captive implementation and (3) captive maintenance. In the way we operate, the client(s) remain in control while the management and staff of Mesquite fulfill the day-to-day operational needs of your captive.
Each client may engage as hands-on or as hands-off to the degree they wish. Our team provides full, ongoing education, collaboration, and integration with client’s existing staff and support team. A captive may be established and run on “auto pilot” with only annual decisions regarding the amount of insurance to purchase and investment strategy. Alternatively, a client may wish to be integrally hands-on in maximizing the strategic utility of their captive and its investments.
Appendix A: Examples of Captive Insurance Policy Types
Below are some examples of the many types of commercial insurance policies possible in a captive:
- Antitrust & Unfair Competition
- Advertising Liability
- Commercial Vehicle Insurance
- Errors & Omissions
- Construction and Design Defect
- Copyright Infringement
- Performance Claims Against Liability
- Deceptive Trade Practices
- Structural Defects
- Directors & Officers Liability
- Title Insurance
- Employment Practices
- Trademark Infringement
- Libel & Slander
The below are examples of additional policies possible in a captive:
- Administrative Action
- Currency Risks
- Product Tampering
- Advertising & Marketing
- Delay Start-Up
- Production Benchmarks
- Antitrust and Unfair Competition
- Eminent Domain
- Property Damage
- Business Credit Cover
- Financial Crime
- Trade Secrets
- Business Dirty Tricks
- Force Majeure
- Strike and Labor Unrest
- Business Document Forgery
- Foreign Operations
- Business Extortion
- Administrative Delay
- Business Interruption
- Insurance Failure
- Trade Credit
- Business Reputation
- Knock-Off Lost Profit
- Trade Good Will
- Cargo Consequential Loss
- Lawsuit Interruption
- Patent & Trademark Infringement
- Cash In Transit
- Labor Costs
- Transit Risk
- Commercial Crime
- Legal Expenses
- Unfair Calling of Guarantees
- Communication Breakdown
- Lender Failure
- Weather Risks
- Computers: Dissemination
- Loss of Key Customer
- Computers: Loss of Data
- Loss of Talent
- Computers: Software
- Machinery Breakdown
- Computers: Virus Loss
- Market Flooding
- Market Risks
- Contract Frustration
- Political Risk
- Copyright Infringement
- Product Launches
- Disability Insurance
- Long Term Care Insurance