OFFSHORE INSURANCE COMPANY
An offshore insurance company offers businesses and professionals an excellent way to turn a major money drain – insurance premiums- into an income earning asset.
Public insurance companies have a huge infrastructure with an extensive physical infrastructure (buildings, computers, vehicles, etc), operational and major marketing costs, highly paid executives and huge employee base, layers of seller commissions, monstrous legal costs and not to mention suffocating bureaucratic federal and state regulations. Your premiums to these companies pay for all of this plus their profit margin and – lastly – after satisfying these demands on your premiums – your insured risk. Ever notice the short deadline demanded to pay your premiums? And the difficulties/delays in getting claims processed and paid?
The recent global financial crisis also saw stock market losses and other mitigating factors contributing to the demise of, not just giant financial institutions of the likes of Lehman Brothers but also of multi-national insurance companies. The insurance companies that managed to survive this financial catastrophe have raised premiums, reduced benefits, and have often become difficult in satisfying claims.
Regardless of attempts to reduce what they pay in premiums, companies must pay more money each year to insurance companies. Although these premiums are tax deductable, they are still a drain on the company profits and, of course, the company gets no investment value from the money after it has been paid.
There is a highly cost-effective alternative you might wish to examine; setting up an Offshore Captive Insurance Company for self-insurance for minor risks and access to lower cost reinsurance in the commercial insurance underwriting market for major risks.
An Offshore Captive Insurance Company is a form of self-insurance where a company, group of companies or professionals, or a wholly owned subsidiary company of a non-insurance company that sets up an insurance company to underwrite the insurable risks of its parent company or of its related or associated companies. Part of the premiums are usually allocated to cover for the normal or expected loss. To cover for potential catastrophic loss the captive takes out a re-insurance policy in the commercial insurance market with major re-insurance companies such as Lloyds of London.
Captive insurance companies have direct access to commercial insurance underwriters and enjoy substantial discounts and credits often based on the company history rather than the industry standard.
Premiums for insurance cover are, in most countries, tax deductible irrespective of the nature of the insurance company. But self-insurance through the creation of – for example – savings or investment accounts within the corporate structure normally are not allowed for tax deductions until the funds are actually used to pay a claim. A captive insurance company transforms self insurance into a distinct corporate entity and thus permits tax deduction of premiums.
Let’s take by way of example of a medical practice with 10 resident doctors each with different fields of specialties, i.e. gynecologist, ear, nose & throat, dermatologists etc.
The practice pays $100,000 to cover the doctor’s respective field. Total premium paid annually is $1,000,000 paid annually. Claims made are minimal and are, as is the norm today, subject to excess clauses in the policy.
The doctors decide to form a medical captive insurance company to underwrite the insurable risks of their medical practice. This captive is wholly owned by the doctors.
The $1,000,000 premium paid to this captive is tax deductible. Assuming there are no major claims, the earned premium less operating expenses for that financial year is net profit.
In a perfect world, everyone lives happily ever after year after year and glow contently on the retained premiums. However given the litigation insanity that exist in some legal systems and to cover the potential catastrophic losses, the captive will take out a reinsurance policy in the commercial insurance market.
Of the $1,000,000 premiums, this captive may allocate an amount; say a maximum of $500,000, to cover for claims. The reinsurance company will then cover any excess over and above this amount.
At the end of a financial year, balance left over in the allocated sum after satisfying claims is additional profit.
In this scenario, the practice still retains the advantage of being fully covered as was the case prior to setting up the captive company, but now retain the net profits which would otherwise be for the benefit of their previous insurer.
This captive formula can work in many ways. Captive insurance companies may be:-
• Pure captive – a company wholly owned by its parent and insuring only the risks of the parent.
• Mutual captive – a company set up to insure the collective risks of members of mutual organizations such as medical professionals, trade or industry associations. Generally the membership must be limited to 10 members or less or it may be considered a public insurer.
• Reciprocal captive – an association of separate entities who undertake self insurance on a collective basis under a general management structure. Mutual captives can expand their basic fund by working together under a general management structure.
• Pure captive turned commercial underwriter or re-insurer – a pure captive entering the commercial insurance market by seeking business from external sources in addition to the core group.
A captive insurance company may insure almost any form of insurable risk, however the most common types of insurance cover effected through captives are:-
Product liability coverage
General property and casualty coverage
Medical malpractice liability
Workers compensation
General property (usually minor claims)
Loss of profits
Marine-cargo and hulls
Employee benefits
Group pension plans
Casualty
Products recall
Product liability
Pollution liability
Expropriation of assets
Nuclear explosion (think Fukushima, Japan)
Currency devaluation
In recent years, corporate groups with large insurable risks have found that the cost of insurance is a major overhead. Increased overhead, inflated pay-outs, and poor stock performance has made insurance companies escalate premiums and minimize services and conditions.
Standard premium levels are based on losses on an industry or group basis. Companies that spend more money and time lowering risks pay the same rate as companies that are careless. Also, standard policies force companies to insure risks that they might not, in fact, be exposed to or to risks that a company might only face in very rare instances.
A captive insurance company coupled with a reinsurance program offers greater cost reductions than inadequate premium credits of deductibles offered by conventional insurance.
The net premium income and investment income of captive insurance companies based in Vanuatu will pay little or no tax on their total income, thereby enabling reserves to be accumulated at a much greater rate than would be possible for domestic captive insurance companies. This permits Vanuatu captive insurance companies to gradually increase the assumption of risk and reduce premiums on reinsurance.
In summary a Vanuatu based captive insurance company offers the following principal advantages over a domestic captive insurance company:-
1. It can accumulate reserves at a faster rate because it is not taxed on net premium and investment income.
2. It is free from exchange controls.
3. It can maintain complete flexibility in its investment policy.
4. The absence of government interference, apart from the normal supervisory oversight of the regulating authority to ensure compliance.
One of the primary functions of a captive insurance company is to reduce the overall cost of insurance without disproportionately increasing the loss potential. Cost reductions achieved by a more realistic assessment of premium levels, reinsurance credits and commissions, and taxation savings must be offset against operating costs. The lower the operating costs, the greater the cost reductions and potential earnings of the company.
Investment of the capital, reserves and accumulated premium and investment income is critical to the success of a captive insurance company. These are the funds which will cover the self-insured portion of potential losses. Vanuatu captive insurance companies have the option to take advantage of their flexibility in investment policy for prudent and sound long term benefits.
Moores Rowland has been operating in Vanuatu since 1973 when the first “offshore” Insurance legislation was first introduced.
In 2005 a new Insurance Act was passed by Parliament and gazzetted into law. The Act was written to regulate the whole insurance industry, however the main thrust of the legislation was to streamlined the process for the establishment of an offshore captive insurance company efficiently and to promote Vanuatu as the preferred jurisdiction for captive insurance in the region.
The Vanuatu government ha seen the importance of this industry to the development of the country that it has taken pro-active measures to market and promote this product by way of representation in all major captive and other insurance events around the world.
This exposure and marketing has succeeded and Vanuatu is now a leader and the center for captive insurance in the region.
Moores Rowland have incorporated and managed a vast and diverse group of captive insurance companies over this period. With the firm’s roots in the founding of the offshore center, the current partners have longstanding experience in the establishment, administration and accounting for Offshore Captive insurance companies including reinsurance management, claims management, and funds management.
We offer a complete range of services to assist your company in setting up an insurance program that can provide major financial benefits to your company or to a group of companies that wish to join together in a cooperative venture.