Risk & Business Magazine Jones DesLauriers Insurance Spring 2017 | Page 8

BY: SCOTT IRWIN, PARTNER &
ACCOUNT EXECUTIVE,
JONES DESLAURIERS INSURANCE
A
The Benefits Of
Forming A Captive
What You Need To Know
captive insurance company
(captive) is a wholly owned
subsidiary of a parent company
(or group of companies)
that is created to provide
insurance products to its non-insurance
parent company. Simply put, a captive is
established to meet the risk-management
needs of its owners. Once established,
the captive operates like a traditional
commercial insurer by issuing policies,
collecting premiums, and paying claims.
Although a captive does not offer insurance
to the public, it may, in some cases, insure
risks that are external to its parent company.
Since captives are different from traditional
commercial insurance companies, they
are not regulated in the same way as
traditional insurers that serve the public;
however, they are usually regulated by the
same regulatory body as these commercial
insurers.
While captives are typically owned by a
parent company, a captive can also be
owned by a group of companies with similar
exposures such as a trade association. Also,
they can be used to provide coverage either
directly or as reinsurance of a primary or
fronting insurer.
WHY FORM A CAPTIVE?
Most corporations, whether public or
private, create a captive to mitigate their
exposure to a wide range of risks. By
owning the captive, parent corporations
can reduce insurance costs, streamline the
administration of insurance, and achieve
tax benefits. As you can see, captives can be
a highly effective risk management tool.
The captive has the ability to provide the
same coverage as a traditional commercial
insurer, and in many cases, the captive can
provide access to hard-to-find commercial
insurance. Traditional insurers do not
meet every risk management need for every
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business and, as risks evolve, responses to
managing these risks must change. For
both of these reasons, a captive comes into
its own.
BENEFITS DERIVED FROM A CAPTIVE
To determine whether forming a captive is
the best method of financing and managing
the risks inherent in your organization
and the industry you participate in, it’s
important to compare the benefits derived
versus the resources expended:
PROTECTION FROM MARKET SWINGS
By forming a captive, the parent
organization will have the advantage of
charging consistent premiums that will
allow a buildup of surplus to insulate
the parent company from typical market
swings associated with commercial
insurance.
COVERAGE FLEXIBILITY
A captive has far more flexibility when it
comes to tailoring the coverage needs of
the parent company and can provide the
coverages that may be difficult to obtain,
or that are prohibitively expensive in the
traditional commercial insurance market.
PROFIT
Many parent companies are motivated
by the profit opportunities that are
presented when they see that their
captives can underwrite customer or
related-party insurance business.
PRICE STABILIZATION
Traditional commercial insurance
products are priced according to the risk
and loss experience of an entire segment
of an industry. This pricing practice fails
to reflect the difference in loss experience
for an individual insured (the parent
company). Therefore, insurance pricing
can be volatile when based on market
conditions. The captive organization will
base pricing on the parent only and be
able to deliver more stable pricing over
time.
IMPROVED CASH FLOW
The captive possesses a considerable
ability to generate investment income
from unearned premiums. This is
especially evident where premiums
are received in advance but losses are
paid out over a long period. Since this
investment income can accumulate in a
tax-free domicile, the captive can have
additional funds available to pay claims
and a corresponding reduction in further
funding needs of the captive.
HOW TO FORM YOUR CAPTIVE
The formation of a captive can be intense
due to regulatory requirements and the
multiple steps that must be taken to acquire
licensing and certification. The first step
will be to partner with an experienced and
reputable captive consultant to discuss
the details of captive formation and the
management of the company. +
Scott has over 10 years’ experience in
the insurance industry. In his tenure
he has held various positions at a large
global insurer; in his current role as an
Account Executive, Scott’s expertise lies
in hard to place property/liability, high
hazard manufacturing, large commercial
construction and the growing renewable
energy sector. Active in the industry,
he has involvement with a variety of
associations including the Canadian wind
Energy Association (CanWea), Canadian
association of Petroleum Producers
(CAPP), Toronto Construction Association
(TCA), The Risk Management Society
(RIMS) and the Architectural Conservancy
of Ontario (ACO). Irwin is a Registered
Insurance Broker of Ontario (RIBO) and is
working towards his Chartered Insurance
Professional (CIP) designation.