Rent-A-Captive Insurance Company Development

Rent-A-Captive amends Company DevelopmentA Critical analytic thinking of the Benefits, Risks andImplications of Creating an Off-shoreRent-a-Captive Insurance Company in Bermuda.Contents (Jump to)AbstractChapter 1 MethodologyChapter 2 Research ProcessChapter 3 Findings and rating of Findings3.1 Captive3.2 Analysis of Benefits, Risks and Implications3.3 Rent-A-Captive3.4 Pestle Analysis3.5 Porters Five ForcesAbstractThe electromotive force for utilizing a rent-a- draped facility in Bermuda represents a method that is a business proposition to examination the fortunes, benefits and implications of utilizing this as a vi satisfactory strategy. Inherent in equating any strategy be its suit efficiency, ease of entry and exit as fountainhead up as woo and weighing these against the learning curve and relative benefits that leave accrue in best and worst case scenarios. To reach such a determination, the examination will employ a act of strategic as swell as financial tools, al ong with the advantages and disadvantages of the methodology to determine its viability in a general, specific and general sense. The use of any business strategy has either direct and or indirect implications which represent variables that must prove their worth in their ability to shape up the all over t forth ensemble aims, objectives and resolve of the entity and to be particularly of benefit in adverse economic conditions and or unforeseen occurances.The preceding tough evaluative climate represents the window pane test via which to effectively prove or disprove its potential worth to the enterprise.A mantled policy company represents an entity that is banding up for the limited purpose by parent redress companies to finance trys from the main organization and or its subsidiaries (Bawcutt, 1997, pp. 8-9). Rather than representing a new concept, intent policy companies have been around since the middle 1870s, borne out of protection and indemnity clubs of that period which entreated marine insurance in overcomeage of third party liabilities as well as expenses emanating from either operate or owning ships as a principle (Braithwaite and Drahos, 2000, p. 157). The preceding was a matter of the passage of the Lord Campbell Act of 1846 (Alabama Law Review, 2004, p. 884), which was enacted by the English Parliament and entitle the Fatal Accidents Act of 1846 whose purpose was to alleviate the harsh results from either serious injury or death on ships during that period (Alabama Law Review, 2004, p. 884). Claim financial obligation potential was change magnitude as a result of the flood of immigrants traveling to the United States as well as the higher value of cargos and injuries to crew members. The protective covering and Liability Clubs pooled resources to cover claims arising from the passage of the act and minimize exposure for the primary insurance carriers such as Lloyds of London (Alabama Law Review, 2004, p. 884).Captive insuran ce companies can be holdd to go forth insurance coverage for commercial purposes, as well as industrial and governmental entities to insure either all or part of the risks facing an organization (Geisel, 2004). Captive insurance companies also can be formed as a result of companies that have connatural business risks joining together to pool said risks in a cost effective manner to have the needed insurance coverage for these types of areas (Geisel, 2004). The appendd growth in this industry segment is a result of the change in the way businesses and organizations see the way to finance their risks as it represents a more than flexible approach against potential losings, augmenting catastrophic risk that is covered via conventional means (Sammer, 2001). Critical to the preceding is correspondence that insurance represents coverage by a contract binding one party to indemnify an differently against specified loss as a return for premiums paid covering said insurance (Houg hton Mifflin, 2006). It, insurance, represents a form of risk management that is a hedge against close to type of financial loss that has a probable incidence of occurring, indeed insurance represents the transfer of this risk from one entity to a nonher as a result of the exchange of premiums calculated base upon the potential of occurrence.The preceding summary will bring home the bacon an understanding of the purpose and niche regarding captive insurance companies as well as how they fit into the boilers suit realm of the insurance industry represents authoritative ambit information that is germane to the topic of a critical abbreviation of the benefits, risks and implications of creating an off-shore rent-a-captive insurance company in Bermuda.Chapter 1 MethodologyThe methodology that will be utilized in this examination will consist of understanding the nuances involved in the appendage of single parent captives as well as rent-a-captives to determine the penetrating and or obvious differences that represent either positive or negative factors which a company would need to be aware of as well as consider to have a full understanding of the process. Inherent in such is the understanding of the legal, business, regulatory, financial, operational and administrative facets of the process and how these impact upon each other in the utilization of a rent-a-captive facility. The preceding represents a broad based understanding as well as in depth with regard to the benefits, risks, implications and colligate factors. In equating such this examination will employ such tools as Porters Five Forces framework, a SWOT analysis, as well as a Pestle Analysis and a discussion of the Balanced Scorecard to aid in reaching a determination of the foregoing.The limitations to the methodology may be in that the tools of analysis are not directly suitable to analyze the process, and or they may be too many business, operational and or industry variables to enable e quating if the process is or will be effective in all or most instances. The methodology is limited by the complexity of the problem in that the decision branch tree factor may be too large to adequately cover all of the potential nuances and lookings which might be important. As the basis for the study is the suitability of a certain structure for potential utilization, the methodology is thus simplified into gathering and likeness as a means to uncover the basics and related detail factors which appear in multiple sources.Chapter 2 Research ProcessThe research process will consist of secondary measures utilizing books, journals and online sources to provide a wide cross section of ideas, viewpoints, concepts, theories and practices to ensure that the salient pieceational information is based upon the true and actual conditions present. through with(predicate) a comparative analysis entailing systematic methodologies of collecting, review and analysis of data, the foregoing wi ll provide for such an outcome. Yin (1994) advises that in conducting research, one should seek to equate the aligning of such against real life phenomenon by virtue of gathering a upshot of viewpoints to reach a balanced understanding. Yin (1994) also adds that the broader the examination, the wear out will be the grasp of the information and thus conclusions reached.Maxwell (1996) chokes Yins (1994) approach and cautions that quality is more important than quantity, thus the research process will seek to stinker out lesser sources in favor of more established ones through a comparative process. The preceding represents the suggested approach as put forth by Lieberson (1991), as well as King et al (1994). As the subject represents a pragmatic consideration whereby theory is less important, the comparative analysis of sources is easier as the base information should be relatively close, if not identical, depending upon the jurisdictional locale. Said variable renders the resear ch process as relatively straight forward.Chapter 3 Findings and Evaluation of FindingsIn examining the subject matter, background information as well as facts, details and information pertaining to the field of captive insurance companies is an important foundation to understanding the benefits of a rent-a-captive as a comparison. The forgoing includes an understanding of the jurisdiction in which the rent-a-captive is located.3.1 Captive3.1.1 BermudaBermudas entrance into the international insurance mart got its start in 1947 when it was selected by C.V. Starr as the location for his American International Company, Limited (Bermuda Market Solutions, 2005, p. 3). The captive concept was promulgated by Fred Reiss in the mid 1960s as an insurer owned by a non-insurance parent (Bermuda Market Solutions, 2005, p. 3) which was established to finance the insurable exposures of the parent. Bermuda is the orbicular leader in the captive insurance market, suppuration dramatically duri ng the 1980s as a result of group captives that were created to permit smaller companies to align with those of similar interests to thus gain greater control over their insurance through the pooling of risks (Bermuda Market Solutions, 2005, p. 3). One of the largest of these was the OIL Insurance Ltd. that was formed by petroleum companies in the early 1970s as a result of difficulties they were facing in the property insurance market.Table 1 Total Insurance Assets for all International Insureds(in billions)(Bermuda Market Solutions, 2005, p. 3)Bermuda, is the premier put up for captive insurance companies as well as rent-a-captives with in excess of 1700 insurers (Lowtax.net, 2004). The captive insurance market has slowed over the last couple of years in contrast to its rapid growth pace of the late 1980s and 1990s with other locales offering similar advantages thus effectively bringing its share of the global market down to approximately one third of all captives from a high of 40% in the mid 1990s (Crombie, 2005). Locations such as the caiman Islands, British Virgin Islands, Hawaii, Guernsey, and Barbados as well as Dublin, along with an addition 45 other jurisdiction as well as a number of states in the U.S. have slowed Bermudas growth and market share as a result (Crombie, 2005). Other factors in this trend have been (Crombie, 2005)the increased popularity of risk retention groups whose small size, in general, does not make them really suitable for location in Bermuda,increased marketing by new jurisdictions such as Hawaii and Vermont which have the advantage of being American states,developments in the varied types of corporate vehicles that are getable, notably segregated handbill companies,and lastly, the ways in which some jurisdictions count their captives, including those that have formed and not removing them once they have been dissolved.Another important consideration is cost. Bermuda is expensive and thus since cost does matter to smaller captives as well as those operating on slimmer margins, there selection of locale takes this facet into account. Bermudas client base primarily consists of large U.S., European and conspiracy American companies whose presence has been in that location for some time (Crombie, 2005). The cost is offset by Bermudas reputation, quality of professional expertise as well as the ease of access thus minimizing the cost variable over the long term as a result of the foregoing and the locales stability. Another factor that must be considered with respect to Bermudas global positioning in terms of the attraction of new captives is the limited infrastructure on the island for residences, schools and traffic. Bermuda is basically more of an exclusive club which is based upon quality as impertinent to quantity (Crombie, 2005). As the third largest insurance local after hot York and London, Bermudas new business formations in 2004 saw approximately 50% in the form of captives (Lowtax.net, 2004 ). The country is the number one location for segregated account companies with 83 that include 6,234 cells within cells as compared to 126 protected cell companies in all other locations as of 2003 (Lowtax.net, 2004).Table 2 Captives by Domicile grade End 2002(Towers Perrin, 2004)Table 3 Leading Captive Domiciles(Elliott, 2005)The preceding represents data on captives as of year end 2002, thus accounting for the higher figures indicated above, showing captive numbers for domiciles mentioned as a comparison.3.1.2 Rent-a-Captive Insurance CompaniesA rent-a-captive insurance company provides captive insurance facilities to other companies for a fee and protects itself from any losses via individual programs that are further isolated from losses via other programs in the same company (Banham, 2001). Banham (2001) provides the analogy of thinking of a rent-a-captive insurance company as a mall of stores and each store represents the self insurance program of a particular company. The rent-a-captive concept represents the fact that a company does not have to go through the procedures and regulations entailed with incorporating its own captive as it is able to lease one instead. The preceding represents a business rationale for creating an off-shore rent-a-captive insurance company, leasing out its existence.The concept of the rent-a-captive provides much of the same benefits that corporate owned captives do in that it provides (Banham, 2001)increased control regarding losses as a result of improved claims management,the ability to derive a realize from underwriting along with investment income from the funds that are set aside for claim reserves,various tax benefits, andavoidance of accounting and audited account issues, which are the responsibility of the rent-a-captive sponsor.The advantages of the establishment of a rent-a-captive insurance company depend upon a number of factors on the part of the interested company. These aspects shall be discussed in the analysis of the benefits, risks, and implications of a rent-a-captive.3.2 Analysis of Benefits, Risks and ImplicationsIn equating the reasons, as well as benefits, risks and implications of forming a rent-a-captive it is important to have an understanding of the reasons as to why captives are formed, thus providing an understanding of the benefits of a rent-a-captive. The following represent the foregoing (Elliott, 2005)To reduce and or stabilize costGenerally, the financing of risk under a captive reduces overall cost and aids in stabilizes costs long term as a result of being less susceptible to changes in the insurance market. Examples of cost savings are represented by the fact there isno profit load,the reduction and or elimination of commissions to brokers,lower costs for administration,the owners in a captive share in all of the earnings through policyholder or shareholder dividends,a captive avoids costly insurance regulations as well as the exclusion of payments into residual market pools and premium taxes,savings in loss cost is another area as captives serve to increase the awareness of risk management as well as cost awareness among top management.The savings benefits, in general, exceed the expense of both prospect up the captive as well as administering it.Increase capacity and provide access to reinsuranceA captive can access the capacity of reinsurance markets and might be able to provide more coverage limits than available within the retail market. An example of the preceding is whereby multiple insurers participate in what is termed as a slip to offer millions in added capacity which would not otherwise be available. A slip is a binder that often includes more than one insurer. An example of the preceding is provided by Lloyds of London whereby the slip is passed from underwriting to underwriter to initial and subscribe to specific parts of a risk (captive.com, 2006).ControlOne of the reasons for the origin of captives is due to insur ance buyers that were tired of the vagaries of the market regarding insurance and looked for more control concerning underwriting, rates, investments and claim settlements. Captives provided them with these benefits.CoverageAn advantage of captives is that they can provide coverage to subsidiaries and other firms that might not otherwise be possible or available for such areas as professional liability, certain business risks and punitive damages.Rate and form freedomThe benefits of special constructed express can be written by captives as a guide for reinsurers to follow to thus provide coverages for obscure areas.Establishment of better than average claim experienceAs the claim history for a captive insured may be improved or batter than the overall class of business for an insurer in the commercial category, this aspect makes a sound argument for retention of that risk in this framework as opposed to the broader and poorer claims experience as a whole.Recapture of investment inc ome and to accelerate and or manage cash flowThe investment income derived from a captive may be completely or partially retained by the captive as opposed to staying with commercial insurers thus providing revenues that would otherwise be lost.Insurance accounting extra tax treatment accrues to insurance companies, such as tax allowable reserves for claims not paid and in the instance of life insurance reserves no taxes are paid on the internal build up of interest income.Tax deductibilityOther tax advantages are possible such as in the case of multiple owners or insured as well as in the cases where the insured and shareholders are not the same. Another area is in the deductibility of premiums along with the deferred taxation of insurance income. Careful consideration of tax benefits need to be investigated prior to adding such advantages to the list of benefits.Perceived safety of formalized serviceAs the books and records of captives are audited along with the claim reserves be ing under constant review by actuaries, investments managed by professionals and accounts that are maintained by managers that are independent, these services represent checks and balances with so many differing external factors checking the books and accounts that the system has extra measures of safety that in most cases is superior to other means whereby a number of these functions is performed in-house or by the same company.Favorable regulationsMany captives are formed offshore to avoid certain unnecessary regulations concerning solvency. However, just as in seaward solvency regulations, offshore captive solvency regulations are designed to protect policyholders. In some instances this regulation is weak in offshore locales, which is not the case for Bermuda as well as the state of Vermont in the United States.Administrative tool for funding retentionsIn many instances, large organizations create captives to fund differences between their large corporate deductibles or retentio n and smaller deductibles or retention of its individual business units. Under the captive format the main organization is able to offer doctor cost rates that are above the smaller deductibles and balance the equation of as a result overall larger rate, thus spreading the deductible or retention and achieving savings.Risk managementCaptives provide the risk manager with more leverage than the annual cost allocation process.Innovative dealsCaptives can increase the access to certain deals, such as more creative loss portfolio transfers achieved by transferring liabilities from one balance sheet to another.Warehouse dataBeing in a captive can provide a tool for the collection of better as well as more data in support of its cost management efforts. An example of this is that a captive can be the central repository for what is termed common disability cost management for instances when an organization elects to finance certain employee risk benefits as well as worker compensation ris ks.Strategic partner supportCoverage can be made available by organizations for their various business partners as represented by key suppliers and or customers, as well as independent contractors, etc. when the normal market pricing and or terms are not favorable. The preceding may very well provide tax management as well as profit advantages.ProfitIn some instances captives are created to underwrite the risks of a customer or to provide third party insurance. Such undertakings can provide and or add value to an organization as a result of tying the customer to the owner.Some of the preceding areas represent clear financial aspects as well as non financial operating areas which can in certain instances turn out to be as important or more important than the financial considerations in creating or utilizing a captive. The understanding of the benefits, advantages and implications of a captive are integral in the discussion of a rent-a-captive in that the reasons and rationales that a re found in the former also apply to the latter. As such, a discussion of the structuring of captives is an important aspect to be considered in this context, as such aids in the understanding of a rent-a-captive. There are three primary aspects of captives, the financial, operational and of course personnel. Captive financial resources consist of premiums along with capital and investment income. The premiums and or capital can consist of non-investment instruments such as a letter of credit and these financial resources must be sufficient to accomplish three tasks (Geisel, 2004). first is the facet of financing the legal obligation as part of the insurance and or reinsurance agreements. Secondly, the financial resources must be sufficient to finance a commonsense level attributed to adverse development, and lastly, the financial resources needed to fund the expenses of operating the captive.It is important to understand that captives, as well as rent-a-captives operate in a jus t about similar fashion as traditional insurers. It, the captive, directly issues policies to insureds, and or reinsurers via a fronting insurance company (Geisel, 2004). It also collects the premiums and pays claims as well as setting reserves aside to pay for legal obligations stemming from its insurance and or reinsurance agreements, and pay for the captives operating expenses, and dividends (Geisel, 2004).One of the advantages is that captives usually utilize a captive management company to run the day to day operations, maintain books and serve as the liaison with the regulators and Board of Directors (Towers Perrin, 2004). Captives also can and often do utilize specialty service providers, accountants, legal council and actuaries to aid in the operational aspects thus eliminating the need for finding, retaining, and setting up office space to house these aspects, which represent a considerable cost savings in internal administration. In terms of managing costs, captives have t he following benefits and or advantages (Elliott, 2005)ActuarialBermuda requires an actuarial analysis as an aspect of the feasibility study concerning the area(s) of insurance and or reinsurance being contemplated for setting up a captive. The premiums as well as losses are thus based upon this information and when the actuarial review has established a level of confidence in these figures, the captive will thus make a better judgment on regulators, tax advisors and reinsurers. Bermuda requires ongoing actuarial analysis.ExpensesIn most circumstances a captive should be able to operate in a more efficient manner than commercial insurance companies. The captives expenses should be in the area of below twenty percent of premiums, unless loss control dictates a higher ratio.InvestmentIt is a general practice among captives to set premiums to reflect the time value of cash in the assumption that the investment returns will fast approximate the amortization of the premium discount ove r time. The captive investment policy should thus be in keeping with the assumptions that are utilized to set premiums.3.3 Rent-A-CaptiveThe foregoing analysis and details concerning captive insurance companies provides the needed foundational and structural information to better understand the nature of the entity and thus the implications, benefits and other facets associated with electing to utilize a rent-a-captive format. Given the preceding, the reasons and rationales for electing to choose a rent-a-captive format takes on increased meaning. Rent-a-captives represent the fastest growing segment of the captive category and the indications are that they will keep back this trend and become even more broadly utilized in the future (International Risk Management Institute, 2004). Large corporations usually establish a captive to aid in the underwriting of its risk as well as to assume portions of its losses based upon the prospect of making or deriving a profit from these operati ons (Elliott, 2005). In essence, the corporation enters the business of insurance in an attempt to gain control over its losses as well as to lower the cost of its insurance as a result of deriving a return of profit from underwriting and or investment income. Smaller companies lacking the financial resources to cover the costs of setting up and meeting requirements for a captive can derive much the same benefits through renting a captive as the alternative to receiving the indicated benefits from their insurance program(s). Rent-a-captive insurance companies are in general funded, created and rented by insurers, brokers or groups of affiliated businesses (International Risk Management Institute, 2004).The determination as to whether a rent-a-captive represents a viable as well as sound proposition is dependent upon a number of facets that can be summarized as follows (Geisel, 2004)size of the company considering utilizing a captive, or rent-a-captive,the amount of losses it ha