A captive insurance company is an alternative risk transfer vehicle that is wholly owned and controlled by its insureds for the primary purpose of insuring the risks of its owners.
The owners contribute their own capital in exchange for ownership in and control of the insurance company and to benefit from the potential underwriting profits.
captive insurance company may be the best risk financing strategy when insurance products offered by the traditional insurance marketplace are either unavailable or don’t meet an insured’s risk financing needs because they are either too expensive or there is limited capacity.
Forming a captive will allow the insured to tailor its coverage to:
meet its needs
reduce operating costs
improve cash flow
generate investment income to fund losses
provide funding and underwriting flexibility
give greater control over claims
incentivize better loss control; and
provide direct access to wholesale reinsurance markets.
WHAT WE DO
We can assist with:
Business planning, feasibility studies, financial projections and working with your legal and tax counsel to navigate the incorporation and regulatory approval process
Structuring transactions and establishing cells
Managing cash flows and financial reporting obligations
Handle the regulatory compliance requirements manage.
We have the independent expertise to assisting you in undertaking a full evaluation of the structure that would best suit your risk management goals.
JLTIM brings together a global team with expertise in providing consulting and management services to risk transfer and transformation/securitization structures plus reinsurance company management.
How to incorporate a cell?
An efficient cell incorporation process requires the following steps:
1. Completion of a feasibility study
2. A preferential shareholding or participation agreement between the cell owner and Isosceles, granting rights to underwriting profit and investment income.
3. Establishment of reinsurance or other collateral mechanisms
4. Approval from the Isosceles Board of Directors
5. Agreement to Isosceles terms and specific clauses from reinsurers when the cell is 100% reinsured
In circumstances where Isosceles assumes risk, it must be 100% collateralized by either acceptable collateral (net of assumed premium) or reinsurance. Acceptable collateral can be:
Letter of credit
Collateral trust account
Reinsurance with approved security
Captive insurance companies fall into three main categories:
Pure/single parent captive – an insurance company wholly owned by its insureds parent company
Sponsored cell captive – an insurance company owned and controlled by an unrelated party from the insureds (typically by a sponsor)
Group captive – an insurance company owned by its member/insureds where they share a risk amongst one another.
For a variety of reasons, one may not wish to form a pure captive or join a group captive, in which case an efficient and cost effective sponsored cell captive facility may be an ideal alternative risk management solution.
For many years, cell-captives have been a popular alternative to a wholly owned captive due to the ease of implementation and lower setup costs.
SACS, PCCS, ICCS AND SPCS
The viability of the cell captive concept has been enhanced by the utilization of segregated accounts in many domiciles and has grown considerably as a result.
Segregated Accounts Companies (SACs), Protected Cell Companies (PCCs), Incorporated Cell Companies (ICCs) and Segregated Portfolio Companies (SPCs) are all based on the same concept of creating legal segregation of programs, assets and liabilities to ensure one participant’s loss experience cannot pollute another cell.
Depending on the domicile, the terminology may refer to SACs, ICCs, PCCs or SPCs, but the logistics and operations are generally the same.
HOW ISOSCELES WORKS
The amount of risk the cell manages can be determined in close collaboration with JLTIM and your broker/advisors. Premium for the policy flows from a fronting company to Isosceles, less applicable costs, which is held in an account for your benefit.
Depending on the line of business and domicile choice, the specifics can be addressed in order to tailor the solution to fit your needs. JLTIM highly recommends your broker/advisor partake in these discussions. Any underwriting profit can be returned to the parent if the cell retained risk is backed by collateral.
Isosceles cells can also be used for alternative risk financing structures. In the world of ever-increasing convergence between insurance/reinsurance markets and capital markets, it is often the case that an intermediate vehicle, the risk transformer, is needed to bridge the gap between these two distinct markets.
The evolving linkage between capital markets and reinsurance markets has led to unheralded innovation of capital market solutions and insurance/reinsurance structures.
JLTIM has an unparalleled record working alongside leading investment banks providing management services to their risk transformation vehicles.
These vehicles have tremendous flexibility to sell or buy protection in a wide range of different forms. With this flexibility, the transformer can transact using (re)insurance contracts and, in turn, fully hedge the risk assumed through International Swaps and Derivatives Association (ISDA) derivative contracts in capital markers (or vice versa).
Transformers can also play an integral part in securitization structures, converting illiquid risks into Insurance Linked Securities (ILS).
ACCESS TO REINSURANCE
For the larger, more sophisticated insurance buyer, reinsurance markets will no doubt play an important part in the management and financing of risks.
The broader marketplace provides increased choice and, of course, greater capacity. It is likely that you will need to access reinsurers through a licensed insurance company, and the costs and administrative burden of establishing and running your own captive can make this an unattractive proposition.
Isosceles can act as your conduit to reinsurers. JLTIM has developed a suite of documentation to ease the process and have also identified some of the technical challenges inherent in reinsurance arrangements. In short, we can help you to navigate your way through the minefield of the global reinsurance market. A simple program chart is demonstrated in Exhibit 2.