The concept of captive insurance is becoming ever more popular each year as insurance premiums rise. It is a $9 billion business world-wide and captive companies now account for more than 20% of non-life insurance premiums in the United States. There are over 2,500 captive insurance companies around the globe.
The reasons for setting up a captive insurance operation are varied. Examples are:
- The use of a captive insurance company ensures greater control over insurance premiums and related costs.
- The insured does not have to subsidise the claims of other companies with poorer claims records.
- The premiums which are paid to the captive insurer relate to that risk and the captive's cost. Premiums to a conventional insurance company may go towards the insurer's administration, marketing, brokerage, commissions and so on.
- The insurance cover obtained this year may not be available next year because many insurance companies may either stop writing such risks or alternatively, raise premiums to prohibitive levels.
- A captive insurance company can provide services and risks which are not available on the open insurance market.
- A captive knows the risks which it faces and thus there is greater predictability of insurance costs in the future than in the conventional multi-risk insurance company.
- Rather than paying premiums in each country in which one operates, a global approach may be taken with the result that high risk operations in some countries can be balanced by lower risks in another country in a way which is not easily done in the conventional insurance market.
- A captive insurance company has direct access to the reinsurance market which means that, apart from the other advantages involved, the captive will be paid commissions from the reinsurer and this will improve the cash flow of the captive insurer.
- If a parent organisation pays premiums into a captive organisation and the captive then invests those premiums, the returns on those investments, less any claims, may be paid to the parent organisation.
2. LOCATION
Traditionally, captives have been established in such locations as the Bahamas, Barbados, Bermuda (where there are over 1300 such companies now operating), the Cayman Islands, Gibraltar, Guernsey, Hong Kong, the Isle of Man and Luxembourg. The newest location and one with many positive characteristics is the International Financial Services Centre in Dublin.
A variety of issues are relevant when selecting a location for a captive insurance company.
It must be a stable political country which is investor positive. There must be good banking and accountancy services. The taxation structure must be efficient and attractive. The regulatory system must be facilitary but not loose. There must be no exchange controls which would impede the flow of funds to and from the parent organisation to the captive insurance company.
3.INTERNATIONAL FINANCIAL SERVICES CENTRE, DUBLIN
In 1987, the Irish Government decided to establish an International Financial Services Centre in Dublin ("the IFSC"). The reaction world-wide was so positive that the project is now one of the most successful ventures of this type ever undertaken. Over 400 companies have decided to set-up in Dublin - including top US, Japanese, German and UK banks, big-ticket lessors as well as fund and treasury managers from around the world.
- 10% Corporation Tax guaranteed until the year 2005
- Zero local property taxes for ten years
- Double Rent Relief
- Capital Allowances
- No Exchange Control on Overseas currency
- Well-educated and relatively low cost workforce
- Investor-positive regulatory environment
- World-class telecommunications service
- Intermediate time-zone between New York and Tokyo
- Attractive Work Environment
- Within the European Community
- Stable Political Environment
Of particular interest to captive insurance companies considering the IFSC will be:
- Tax Efficiency
A corporation can move profits from high tax countries where they have subsidiaries into their captive insurance company in Dublin and pay only 10% tax. Dublin should be part of the global tax strategy of any international corporation.
- Tax Respectability
Revenue authorities in other countries are less likely to contest deductions of premiums made to Irish captive companies than deductions made to captives in other jurisdictions where the tax regime is very loose.
- Tax connections
Ireland has concluded 27 double-taxation treaties with various countries throughout the world and captives established in Dublin Centre will benefit from those treaties. This may be relevant when comparing Ireland with non-EC tax havens.
- Low Taxes
A captive insurance company operating in Dublin avails of a 10% corporation tax rate on its underwriting profits as well as its investment income. This regime has been guaranteed to last until the year 2005.
- No Withholding Taxes
There are no withholding taxes on dividends paid by captive companies operating in the Dublin Centre. Nor are there withholding taxes on interest paid by such companies.
- Inside the EC
If non-EC corporations are obliged in the future to insure their EC Operations through an EC company then by being in the Dublin Centre, the corporation overcomes the problem.
- Staff
Ireland has a pool of well-educated highly motivated young people who have gained considerable experience in the financial services sector.
- Captive Management
Many of the world's leading captive insurance management companies have established in or announced their intention to set up in Dublin.
4. REGULATORY ISSUES
As a general rule, the Irish Central Bank supervises and controls financial institutions operating in the IFSC. However, insurance (including captive insurance) falls within the jurisdiction of the Minister for Enterprise and Employment who is responsible for supervision and control of this sector.
It is illegal to carry on a business of insurance (whether life or non-life) without being authorised to do so by the Minister or without being authorised by the regulatory authorities of the EU country in which an insurer has its head office.
A captive insurance company proposing to establish in the IFSC must apply to the Minister for Enterprise & Employment for authorisation to operate. At a minimum, the application must include:
- a business plan including three year projections;
- details of the directors, management and shareholders;
- a statement that the insurer proposes to operate in Ireland by way of an office situated in Ireland which will be staffed by persons qualified to issue cover and settle claims;
- proposed reinsurance treaties;
- details of the policy documents; and
- an application fee of IR £4,000.
The captive insurance company must have a minimum paid up share capital of at least IR £500,000 and must meet the normal Irish on-going solvency ratios. Insurance companies in Ireland are, on occasions, subject to various levies but captive insurers which are engaged in non-Irish business only are not normally subject to such levies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
