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What is a Captive ?
and Other Frequently Asked Questions

What is a Captive? 

A Captive Insurance Company is a Property and Casualty Insurance Company that is formed to cover risks of its parent or affiliated companies. Captive Insurance is a risk management tool which allows businesses to more effectively and efficiently manage corporate risk. Captives are often set up to insure loss of income risk, otherwise known as enterprise risk, risk for which insuring against losses arising from various risks where insurance from standard insurance carriers is ether not available or prohibitively expensive.  

 

Are Captives New to the Marketplace? 

Captive Insurance is not a new concept. The concept of a business forming a wholly-owned insurance company which would insure its owner’s risks can be traced back to the group of London merchants who lost their assets in the Tooley Street fire in 1861. The concept continued in the 1920s when several corporations with multi-national interests, including British Petroleum, Unilever and Lufthansa each formed wholly-owned insurance companies. The late Fred Reiss conceived and marketed the concept of a wholly-owned insurance company which he called a “captive”. In 1957, Reiss formed his first captive in Cleveland, Ohio for the Youngstown Sheet and Tube Company; over the years captives have stood the test of time. Many Fortune 500 companies have their own Captives. Thousands of small companies have also set up captive insurance companies. What is different today is that a client can enjoy a conservative structure within a highly regulated U.S. Domicile.  

 

What type of company can benefit from a Captive Insurance Company? 

Captive insurance companies can suit a wide range of companies. Large corporate structures often benefit from creating a wholly-owned captive, or "pure captive" to insure risks suitable for the organization's business needs. Smaller companies can benefit from captive insurance planning by insuring enterprise risk exposures for which commercial insurance is not available, or may prove too costly via traditional insurance carriers. Every company has and insures these types of risks. However, many companies choose to self insure these risks without the benefit of protections provided by an insurance company vehicle as indicated above.

 

What are the Advantages of a Captive?

All companies face the risks that can be insured through a captive insurance company. However, most self insure those risks through their operating companies because coverage is prohibitively expensive or unavailable from their typical insurance outlets. Unfortunately, many business owners are unaware of the disadvantages associated with self insuring these risks through their operating companies rather than through a captive insurance company. 

 

What Investments Can a Captive Own to Provide Reserves?

A captive can own any investment approved by the insurance regulators in the jurisdiction where the captive insurance company is domiciled. It is important for the captive to maintain appropriate liquid reserves in order to meet potential claims liabilities. Therefore, U.S. based captive insurance companies are highly regulated, and investment portfolios tend to be conservative and provide significant liquidity. Investments can be tailored to meet the needs of individual investors and can include mutual funds, individual stocks and bonds along with tax free municipal bonds and other asset classes generating annual dividend income.

 

What is a Typical Captive Design? 

According to industry reports, approximately 90% of the world's captive insurance companies are domiciled outside of the U.S. Among the advantages of an offshore captive are potentially less restrictive regulatory oversight, broader range of acceptable investment options, low set up costs and ongoing expenses. Our primary captive design is meant to marry a highly regulated U.S. domicile with very cost efficient economies of scale. The company considering forming the captive must have the financial resources to contribute to the captive insurance company. All U.S. jurisdictions have minimum capital requirements for captive insurance companies, and successful operations require the services of numerous professionals such as lawyers, actuaries, accountants, etc., to assist with the creation and provide ongoing maintenance of the captive. A captive management company will be retained, to coordinate the activities of the other professional, provide claims review services, and manage the day-to-day operations on a turnkey basis. 

 

What jurisdiction should I select for my Captive Insurance Company? 

At ALINK, captives domicile in several States throughout the Country.  You may be required to travel to the jurisdiction to perform any implementation activities and physically form the captive insurance company. Additionally, most jurisdictions require the captive to have at least one meeting per year within the jurisdiction, along with a registered agent and a physical address. There are numerous U.S. domiciles offering attractive captive statutes, with excellent regulatory oversight, respected courts, significant case law and corporate law expertise in a stable environment. Several jurisdictions allow for captive design and formation with efficient, cost-effective structures. 

 

How Can I find out if a Captive Insurance Arrangement is right for me? 

In order to make a determination if a captive insurance arrangement is desirable, ALINK Captive Insurance Services will facilitate the preparation of a feasibility analysis. This is an analysis which includes input from actuaries, attorneys and risk managers. The purpose is to analyze the parent company’s risk profile and financial position to determine the appropriate type of insurance policies to underwrite along with an analysis of the legal environment for the proposed captive domicile and financial projections for the captive that the company potentially may be forming. The information gathered during the analysis will be incorporated into a formal feasibility study and report, to be submitted to the insurance regulatory team along with the business plan, as part of the review process for potential captive formation. Prior to implementation of your captive insurance company, we will provide review services to make an initial assessment of the potential viability of a captive for your situation. In the event a captive insurance company would meet your goals and objectives, you will engage the services of legal counsel to draft the necessary documents and seek regulatory review by the insurance department of your selected jurisdiction, prior to implementation. The insurance department regulators will work with your implementation team to review and approve the structure, coverage, policy language, pricing and captive business and investment plans, as appropriate. 

What is the Time Horizon for a Captive? 

Any company considering forming a captive should have a long-term plan for the proper development and implementation of a captive program. Once the captive insurance company is established, an organization should set aside a minimum of seven years before taking distributions or dividends from the captive, and ideally, this time period should be at least 10 years. 

 

What is ALINK’s role in setting up a Captive Insurance Company?

ALINK engages the very best accountants, attorneys, third party administrators, and wealth managers to create a team of experts who effectively design, implement, and manage each Captive.

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Investment advisory services offered through Redhawk Wealth Advisors, Inc., an SEC Registered Investment Advisor. Alink Captive Insurance Services and Redhawk are not affiliated.

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