Captive insurance: Reducing your company costs
What is a 'captive?'
Captive insurance companies are unknown to most Polish entrepreneurs as they are not contemplated by Polish Law.
A captive insurance company is an insurance company whose business is supplied and controlled by its owners. The main object of a captive insurance company is to concentrate all the insurance interests of related companies who are not in the insurance business themselves. There are two types of captive insurance companies: (a) those controlled by a single parent company and its affiliated companies; and (b) those controlled by trade associations.
Captive insurance companies provide coverage at lower costs and represent an alternative to the conventional insurance market. The company's shares are controlled by one shareholder or a group of related shareholders to provide coverage for their business operations. Possible covered risks include pensions and life insurance, professional risks, and risks that are uninsurable or extremely onerous in the conventional market.
'Captives' are only allowed to insure the risks of parent or affiliated companies. Therefore, they are restricted from engaging in normal insurance activities, thus insuring risks of individuals and/or third companies.
Why set up a captive?
There are many reasons to set up a captive insurance company, including:
Reduced Costs. A captive may be able to charge lower premiums based, e.g. on the company's previous losses. A captive's premiums may be based on a particular level of risk instead of the insurance market's general overview for the type of risk.
Investment. By establishing a captive insurance company, the owner can control the investment portfolio to which the excess premiums are applied. Obviously, this would not be possible when purchasing insurance from a traditional insurer. Also, offshore captive insurance companies have much more flexibility in terms of what they may invest in than their onshore equivalents.
Reinsurance. The owner of a captive clearly wishes it to remain solvent and profitable. Bearing in mind that all or much of a captive's business involves insuring the owner's risks, the claims records of captives tend to be better than that of a normal insurer. This is recognized in the reinsurance market and the premium rates for captives can often be substantially lower than for onshore insurers.
Cover. A captive may be able to provide coverage that is unavailable or prohibitively expensive if purchased from third-party insurers. Certain types of cover are unavailable onshore, while offshore regulations enable the owner of a captive to insure almost any legal risk and allow access to the reinsurance market.
Profit Diversification. Many mature businesses reach a stage where they wish or are able to accumulate profits outside their own jurisdiction and in an activity separate from their normal course of business. This may be for asset protection, tax efficiency or simple diversification reasons.
Who sets up captives?
Captives' parent companies are involved in all sorts of business activities: energy, oil and gas, healthcare, air transport, retail, and shipping, etc. Captives have led to substantial cost savings and profits for their owners.
In recent years, the amount of existing captive insurance companies has increased tremendously. There are more than 7,000 captives worldwide. The most popular locations to place their operations are Bermuda, followed by the Cayman Islands, Vermont (USA), Guernsey, Luxembourg, Barbados, the British Virgin Islands, Ireland, the Isle of Man, and Hawaii. Captives are also regulated in the laws of Panama, New York, Washington, and the Netherlands Antilles.
What are the costs involved?
As with other offshore entities, the costs of operating a captive vary according to the jurisdiction in which it is established. Incorporation costs can range between zł.23,1534-zł.38,589 ($6,000-$10,000). Minimum capital usually is zł.578,835 ($150,000) which needs to be fully paid before the captive can start operating.
In addition to the above described costs, there are also annual auditing and reporting requirements that must be completed and filed with the competent authority at the relevant jurisdiction.
Alma Jenkins-Konarski is a foreign Attorney-at-Law working at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
Captive insurance companies are unknown to most Polish entrepreneurs as they are not contemplated by Polish Law.
A captive insurance company is an insurance company whose business is supplied and controlled by its owners. The main object of a captive insurance company is to concentrate all the insurance interests of related companies who are not in the insurance business themselves. There are two types of captive insurance companies: (a) those controlled by a single parent company and its affiliated companies; and (b) those controlled by trade associations.
Captive insurance companies provide coverage at lower costs and represent an alternative to the conventional insurance market. The company's shares are controlled by one shareholder or a group of related shareholders to provide coverage for their business operations. Possible covered risks include pensions and life insurance, professional risks, and risks that are uninsurable or extremely onerous in the conventional market.
'Captives' are only allowed to insure the risks of parent or affiliated companies. Therefore, they are restricted from engaging in normal insurance activities, thus insuring risks of individuals and/or third companies.
Why set up a captive?
There are many reasons to set up a captive insurance company, including:
Reduced Costs. A captive may be able to charge lower premiums based, e.g. on the company's previous losses. A captive's premiums may be based on a particular level of risk instead of the insurance market's general overview for the type of risk.
Investment. By establishing a captive insurance company, the owner can control the investment portfolio to which the excess premiums are applied. Obviously, this would not be possible when purchasing insurance from a traditional insurer. Also, offshore captive insurance companies have much more flexibility in terms of what they may invest in than their onshore equivalents.
Reinsurance. The owner of a captive clearly wishes it to remain solvent and profitable. Bearing in mind that all or much of a captive's business involves insuring the owner's risks, the claims records of captives tend to be better than that of a normal insurer. This is recognized in the reinsurance market and the premium rates for captives can often be substantially lower than for onshore insurers.
Cover. A captive may be able to provide coverage that is unavailable or prohibitively expensive if purchased from third-party insurers. Certain types of cover are unavailable onshore, while offshore regulations enable the owner of a captive to insure almost any legal risk and allow access to the reinsurance market.
Profit Diversification. Many mature businesses reach a stage where they wish or are able to accumulate profits outside their own jurisdiction and in an activity separate from their normal course of business. This may be for asset protection, tax efficiency or simple diversification reasons.
Who sets up captives?
Captives' parent companies are involved in all sorts of business activities: energy, oil and gas, healthcare, air transport, retail, and shipping, etc. Captives have led to substantial cost savings and profits for their owners.
In recent years, the amount of existing captive insurance companies has increased tremendously. There are more than 7,000 captives worldwide. The most popular locations to place their operations are Bermuda, followed by the Cayman Islands, Vermont (USA), Guernsey, Luxembourg, Barbados, the British Virgin Islands, Ireland, the Isle of Man, and Hawaii. Captives are also regulated in the laws of Panama, New York, Washington, and the Netherlands Antilles.
What are the costs involved?
As with other offshore entities, the costs of operating a captive vary according to the jurisdiction in which it is established. Incorporation costs can range between zł.23,1534-zł.38,589 ($6,000-$10,000). Minimum capital usually is zł.578,835 ($150,000) which needs to be fully paid before the captive can start operating.
In addition to the above described costs, there are also annual auditing and reporting requirements that must be completed and filed with the competent authority at the relevant jurisdiction.
Alma Jenkins-Konarski is a foreign Attorney-at-Law working at Marek Zdanowicz & Partners in Warsaw (ajenkins@zdanowiczlegal.pl)
