Chapter · January 998 doi: 10. 1007/978-1-4615-6187-3 10 citations reads 2,488 author: Some of the authors of this publication are also working on these related projects
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10.Retentionandcaptiveinsurance (1)
Senior Captive: A captive in which the funding of risks of other
organizations has increased to more than 25% of the total portfolio. Profit Center Captive: An insurance subsidiary whose parent's risks
proportion in the portfolio is less than 25%. Group Captive: An insurance subsidiary owned, sponsored or operated by
two or more non-insurance organizations to fund only the risks of those organizations.
Captives are also classified according to whether they are onshore and incorporated domestically (a domestic captive) or offshore, incorporated under a 10
foreign juridiction and operating out of its location. Most of the captive operations are conducted from an offshore location.
From an insurance point of view, there is a pooling of a large number of loss exposures. However, it has been argued that there is no transfer since the risk does not leave the corporate group. When a captive company offers to insure the risks of an unrelated firm or organization, a process usually defined as rent-a-captive (also called Agency Captive), there is no pooling of risk contrary to the insurance mechanism. The coverage is done on a segregated basis and the result of the client, if unfavorable for example, is only the responsibility of the client. The captive receives fees for the service. It is in this case even more difficult to argue that there is a transfer of risk.
The reasons most commonly given for the establishment of a captive are the same as the reasons explaining the decision of self-funded retention. The advantages are those of self-insurance (see Table 10.2), i.e., reduced cost of insurance, premium reflecting the own experience of the parent, possibility of adjustable and self-determined deductibles, lower transaction costs and opportunity costs related to the payment of premiums and the settlement of claims. Captives have sometimes been formed as a mechanism to replace inadequate services for which the cost is included in the basic premium structure. 14
The other reasons for establishing a captive insurer are mainly to overcome some of the disadvantages of self-insurance, i.e., a broader coverage, the access to reinsurance to cover for catastrophic losses, tax advantages. It seems that these factors have been considered important enough to justify the commitment in paid- up capital to establish a captive and the management expenses related to the operations of a captive.
The tax factor was probably the first reason explaining the popularity of captive companies. Deducibility of premiums paid to a captive make the captive alternative superior to internal self-funded programs. The possibility of building- up tax-free reserves and accumulating tax-free investment returns explain also the popularity of some locations for the the establishment of a captive. Again, other things being equal, if the tax environment in one location seems better than that of another, it will be the deciding factor.
This reason seems to be no longer of great importance for companies located in the United States although the 1988 tax treaty between the Barbados and the United States may prove the contrary. 15 It appears that the basic tax motivation behind the continued creation of offshore by companies from other developed countries is still important. 16
The non-availability or non-affordability of commercial insurance is probably today, the most important factor explaining the development of captive insurers. This has been particularly true in the past decade with product liability coverage, professional liability coverage and coverage of risks related to international operations. 17
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In a survey of multinational corporations in the United States, Norman Baglini (1983, p.42) found that lower costs were by far the primary reason for using a captive in foreign operations (almost half of all respondents that had captives ranked this as the number one reason). The second most common reason for using a captive was to provide better control over the foreign insurance programme. The use of multinational captives are more common to petrochemical, energy, pharmaceutical, building products, and food and mining companies than to consumer and industrial goods, and the service sector. 18
Captives, especially those located offshore, are to a great extent exempted from the regulatory and legislative constraints of the insurance market. This is an important factor when considering the advantage of freedom of investment (higher potential returns) and the freedom of movement of funds. Investment opportunities worldwide and the ability to defer taxation on investment income have been considered a managerial objective of captives. 19
A more recent development in the United States is the development of retention opportunities made possible, in the limited area of liability coverage, by the Liability Risk Retention Act of 1986. 20
organizations are permitted to establish risk retention groups to retain the liability exposures (other than workers' compensation) or to create purchasing groups that can purchase liability insurance on a group basis. From a definition point of view a risk retention group is a group captive authorized and domiciled in one State.
The major problems encountered with the formation of a captive company are the inability to spread the risks on a large basis and the incomplete information for the assessment of certain risks. The inability or unwillingness to price correctly (fairly) a risk may be revealed only after a long period of time. This behavior has been described as an "innocent capacity" problem. 21
A captive has also to carry out all the functions of a normal insurance company and as the unrelated (non-parent) business expands, it may cease to be fully under the control of the parent management. In practice, most of the captives are managed by an outside firm and many functions are delegated to outside bodies. Download 442.01 Kb. Do'stlaringiz bilan baham: |
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