A Thought on Captives
Captive insurance is often, and rather myopically, perceived of as the preserve of multinational conglomerates whose risks may be too complex or too costly to be insured in the commercial insurance market. While there is much truth in this statement, in that captive insurance was pioneered in the context of risk management for large scale commercial structures, that truth undoubtedly belies the utility of captive insurance as an effective tool to manage the copious, and often peculiar, risks faced by high-net-worth and ultra-high-net-worth individuals.
Captive insurance is a form of self-insurance which is conventionally effected through a special purpose vehicle that is licensed to operate as an insurance company. In a commercial context, the captive would be a subsidiary company established by the parent company to provide insurance coverage to the parent and other companies within the group. Premiums would be paid by the parent or other companies to the captive and the captive would, in turn, issue insurance policies to the companies within the group to insure them against the risks associated with their business.
Advantages of Captive Insurance
The use of captive insurance offers comparative advantages not attainable when insurance coverage is provided by traditional insurers including:
Cost Reduction: The premiums charged by the captive would be established with input from the insured and could be set at rates below those available in the traditional insurance market in which premiums take account of the commercial insurer’s overhead costs.
Particularized Investments: The investments made by the captive with the premiums received could be invested in a portfolio of assets with a risk allocation which suits the insured’s overall investment strategy and desired asset types. In addition, investment income is retained by the captive for the benefit of the insured.
Specialized Insurance Coverage: The captive would devise bespoke insurance policies which cover risks uninsurable in the commercial insurance market with flexible terms more favourable to the insured.
Captive Insurance in Wealth Management
The advantages of captive insurance can also be leveraged in the context of private wealth management. Therefore, unquestionably, a consideration of captive insurance should form a part of a long term, comprehensive wealth and risk management plan.
Let’s say you’re advising a family comprised of numerous high-net-worth individuals, with a highly diversified asset portfolio containing everything from stocks in Fortune 500 companies to rare artwork. Establishing a captive insurance provider for that family would enable them to insure their otherwise uninsurable assets and retain wealth through investments made by the captive insurance company. The structuring of a captive could also offer further advantages. For instance, the captive could be owned by a family trust and the income generated from the captive’s investments could be distributed to the trust’s beneficiaries, thereby creating further opportunity for the transfer of wealth from one generation of the family to another. Additionally, a captive could be a useful adjunct to a family office structure extending the services provided to a family of high-net-worth individuals to include life, healthcare, property and other traditional forms of insurance to family members.
The Bahamas: a jurisdiction of choice for captives
When seeking to establish a captive, the choice of jurisdiction is paramount. The Bahamas’ presence in the captive insurance industry dates back to the 1960’s.
The regulatory environment in The Bahamas for captive insurance is robust and in tune with current market trends. Insurance legislation in The Bahamas prescribes internationally accepted, yet economical, minimum capital requirements for captives and vests regulatory oversight of captives in the Insurance Commission of The Bahamas, a body which is known to be pragmatic in its approach.
In today’s environment, the ability to demonstrate substance is often key. The Bahamas’ highly qualified workforce and infrastructure can provide the expertise and premises necessary to establish the captive’s physical presence within The Bahamas. This can ensure that the captive is run with optimal efficiency and in accordance with international standards of regulation dictated by bodies such as the OECD and the EU.
About the Author
Kamala Richardson is an associate in the firm’s Private Client & Wealth Management practice group and specializes in wills, estate planning and matters related to trust law, foundations and company law.
*Article first published in STEP Journal, April 2019.
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.Copyright ©2019 Higgs & Johnson. All rights reserved.