GIM11020 - Captive insurers: tax havens and local organisation
Tax havens and offshore financial centres
Captives are generally located in tax havens (see INTM461130) or other ‘offshore financial centres’. The most popular location internationally is Bermuda because of the number of American companies which use it, along with the Cayman Islands.
Many UK groups choose Guernsey or the Isle of Man. A 2008 survey found 50 per cent of UK companies used Guernsey, 21 per cent Isle of Man, 15 per cent Bermuda, 8 per cent Irish Republic, 1 per cent each Jersey, Gibraltar, Malta, Vermont and Cayman. Ireland’s share is increasing, because of EEA domicile (which may also assist Malta). Bermuda’s share was declining. Guernsey is popular partly because of its strong and original presence in the protected cell market - see below.
Luxembourg is popular with Continental groups, along with the Irish Republic. A location needs a developed infrastructure with political stability and good communications. Favourable tax and insurance legislation is also important, and effective regulation (or the rating agencies will mark the regulated companies down). Captive business is vital to the local economy of some of the territories, which vie with one another to acquire and retain it.
A few captives are, by choice, resident in the UK.
If a local management company is employed (see GIM11010), the fee charged will depend on the range of services provided. The local management company will ensure compliance with local law, issue policies, collect premiums, pay claims, prepare reports and provide local directors. It may also offer investment advice.
Directors, normally about five, will probably consist of a representative of the management company, one or two representatives of the parent - the group risk manager, company secretary and finance director/Treasurer are popular candidates - and perhaps two or three other haven residents. Local accountants, retired bankers or insurance specialists are often used. The last may be the only ones paid by the captive.
The brokers may play a major part in the setting up and, via the local management company, the day to day running of the captive. They will probably prepare feasibility studies for the group parent board when it is considering establishing a captive and will continue to advise the risk manager on types and levels of risk which might be left with the captive.
These take two forms, protected cell companies (PCCs) and incorporated cell companies (ICCs). PCCs were originally developed in Guernsey in 1997, and now exist in other territories such as Jersey, Cayman Islands, Irish Republic and Bermuda. ICCs were developed more recently, in Guernsey and Jersey in 2006. The essential difference between them is that an ICC’s cells are legal entities in their own right, unlike the cells of a PCC. The advantage of cell companies lies in the cost and regulatory time saving in the creation of new cells. Cells of ICCs, with legal personality, can more easily transact with third parties, and the ring fencing is stronger, which is an advantage in relation to use in securitisations and structured financial products. Each cell of the PCC or ICC has the same directors, secretary and registered office as the PCC/ICC but different shareholders.
PCCs were originally developed to make the benefits of captive insurance available to smaller companies by reducing costs. Different classes of business can be written into different cells within one vehicle, with one set of formation costs, a single capital requirement and easier repeat transactions. This improved ‘rent a captive’ arrangements which formerly relied upon only a contractual separation of assets. ICCs take the separation a stage further.