Why and how to form a captive
Why and How to Form a Captive
The below summary outlines Why and How to Form a Captive. For an in depth review we invite you to visit the Bermuda Insurance Organisation.
What is a Captive:
A captive is an insurance company usually formed to insure or reinsure the risks of its parents and affiliates. In some cases, captives are also used to insure risks that are not related to their parent organization.
The two main types of captives are single parent and group captives. The latter is typically owned by a number of companies with similar exposures. Some trade associations, for example, operate their own group, or association captive insurers, providing coverage to association members.
Thirdly, there are sponsored companies known as Rent-a-Captives that offer their structure to clients wishing to attain the benefits of captive insurance without either direct ownership or group membership.
Captives can be used to provide coverage either directly or as reinsurance of a primary or fronting insurer.
Why Form a Captive:
There are many reasons to form a captive and the reason to form a captive can be different in each case. We have listed below some, but not all, of the reasons captives are formed.
- Reduce the Total Cost of Risk
- Risk Management Reward & Focus
- Direct Reinsurance Market Access
- Additional Capacity
- Flexibility in Program Design
- “Uninsurable” Risk
- Profit Centre
- Information and Control
- Many more!
How to Form a Captive:
In summary, forming a Captive in Bermuda involves three steps set out below:
Stage 1 – Pre-filing
- Decision has been made to form a captive.
- Selection of service providers:
- Insurance manager
- Law Firm
- Actuary (if required)
- Selection of proposed captive name.
- Completion of application material:
- Business plan narrative
- Five-year financial projection, plus assumptions
- Pre-incorporation form
- Parent company financial statements
- Resumés of proposed directors
- Acceptance letters from service providers, e.g. insurance manager, auditor.
- Incorporation application completed
- Beneficial ownership vetted by lawyers and BMA
- Application to incorporate can be made separate from the insurance application, but is often made in tandem.
Stage 2 – From filing to funding
- Application is filed with the BMA on Monday.
- BMA’s assessment and licensing committee (ALC) meet every Friday.
- Detailed, rigorous but efficient review of business plan
- Communication of ALC review usually made by close of business on Friday.
- Four possible outcomes:
- Approved, but subject to…
- Once approved, organisational meetings held:
- provisional directors
- statutory members; and
- first directors’ meeting
- Items to approve include:
- Approval of service providers
- Approval of business plan
- Approval of bank account opening
- Following organizational meetings:
- Open bank accounts
- Fund captive as per Business Plan
- Submit signed application form to captive’s lawyers
Stage 3 – Issuance of licence.
- Captive’s lawyers file request to BMA to issue captive insurance certificate of registration.
- Confirm on application that captive has been incorporated and funded as per business plan.
- Insurance licence issued within 10 working days, often sooner.
- Captive can start writing business once licence has been issued.
We invite you to visit the following websites which also provide information on Forming a Captive
Captive Service Providers:
Service Providers involved in the captive are can be summarized as follows: