Question (Q): How would you define a captive, and what are the particular benefits of forming one?

Captive Insurance Solutions (CIS): A captive is generally thought of as a closely held insurance company that principally insures related businesses. Today, over 90% of Fortune 1000 companies and many successful mid-market companies have captives. Forming a captive may be one of the best risk management and financial planning tools available for businesses, due in large part to the NZ and Australian tax structures.


Q: What factors can make captive insurance an attractive planning tool for businesses?

CIS: A captive allows its owners to specifically tailor and implement customized policies that are often too expensive or practically speaking unavailable through the conventional insurance markets. A captive provides a platinum level of coverage to an operating business, while allowing the business owners to benefit from the profits of the insurance company in a tax-efficient manner.


Q: In terms of size, which businesses would particularly benefit from forming a captive?

CIS: Generally, a business owner or group of owners would form a captive for a substantial operating business (one that has meaningful uninsured or underinsured risks), with pre-tax profits (before partners’ salary, bonus and other forms of compensation) of $2m or more.


Q: What are the benefits of forming a captive to the business owner(s)?

CIS: The captive insurance company’s potential risk management and asset protection benefits, together with the tax incentives, often combine to make it a very attractive option for successful business owners. The bottom line is that a captive gives owners ultimate control over their insurance needs, and in the event that premium revenue exceeds claims, owners benefit from the profits of their own insurance company. The resulting underwriting profits are tax free.


Q: In NZ and Australia, what measures are in place to encourage the formation of captives?

CIS: Captives are tax advantaged, forprofit insurers. The NZ and Australian government and legislation unfortunately, does not encourages the formation of small insurers to help protect closely-held businesses as a way of promoting jobs and growth. While a captive may be a great financing tool, it does not work for every business. Due to legislation, we utilise countries that provide the business owner with financial benefits to create and place their captive offshore.


Q: Why would a business owner form a captive rather than using a traditional insurance company?

CIS: Captives typically provide supplemental coverage to existing conventional policies, which upon examination are often found to be inadequate. Business owners find that owning their own insurance company helps control the rising cost of risk and provides broader insurance protection by filling in the holes and exclusions of conventional policies that all too often do not match the risks of the operating businesses.


Q: Is it necessary for the business owner to be the sole owner of a captive?

CIS: Ownership of the captive often mirrors the ownership of the operating business. However, the ownership of a captive might also include key employees, children, grandchildren, family partnerships, limited liability companies or trusts.


Q: How would business owners protect their assets?

CIS: Captives are one of the better asset protection tools available. Designed correctly, assets in a captive are difficult for the operating companies’ creditors to reach.


Q: Is a captive easy to establish and manage?

CIS: Captives must operate with dual regulatory parameters: the Inland Revenue Code and the domicile where the insurance company is established. The formation and ongoing management of a captive must be overseen by experienced professionals that understand the insurance, financial, tax and legal aspects of the captive. Because it is a regulated insurance company, our clients often prefer to have a professional third party administer the captive on a turnkey basis. Most regulators demand ongoing professional management.


Q: Can a business owner choose what to insure against?

CIS: Absolutely. A business owner can choose to insure his operating business against events where his current conventional polices fall short. Often the captive’s policies dovetail with the exclusions, exceptions and carve-outs in the conventional coverages.


Q: How prolific is the use of captives in New Zealand and Australian industries?

CIS: Largely overlooked in our region captives in North America and Europe provide thousands of businesses representing industries such as manufacturing, fabrication, distribution, finance and construction, to name only a few, the ability to participate in some type of alternative risk-planning programme to better insure the risks of its parent company. Even Google and the US government operate their own captives. The risks of the contractors excavating the remains of The World Trade Center site were born by a government sponsored captive. An estimated 50% of all property and casualty premiums in the US, are written through captives.


Q: How are premiums paid to the captive?

CIS: A captive is a regulated insurance company that must first be licensed by an insurance commissioner in a foreign jurisdiction. Once established, Captive Insurance Solutions offers consultancy to help business owners and their advisors learn and understand if a captive insurance company is right for them. These discussions, often include our captive management team and eloborate on how to: manage insurance costs, customise coverages, improve cash flow, retain insurance profits, protect your assets and build tax advantaged reserves for future claims. Premiums are paid to the captive like any other conventional policy premiums, except instead of being paid to an outside organisation, monies are paid into the captive


Q: How would a business owner set up a captive?

CIS: A captive insurance company must always be established with a bona fide insurance purpose, in other words, as a facility for transferring risk and protecting assets. The transaction must make economic sense. Beyond this general rule, there is a great deal of flexibility in how the captive insurance company can benefit a client. Business owners interested in forming a captive can contact us to see if their operating companies might qualify.