IPT audit assurance: captive insurers
Captives are insurance companies that are established by businesses, who usually have no involvement with insurance, to underwrite all or some of the risks of their business. There may be a number of reasons why a business establishes a captive insurer. However there are two major factors.
- The business wishes to obtain insurance cover at reasonable rates. In some types of insurance the premiums in relation to the risk perceived by the business requiring the cover may be considered excessive. With some risks businesses may not even be able to obtain cover at any price.
- The business wishes to keep funds in the trading group as far as possible. With an insurance company in the trading group the premiums remain within the group.
The majority of captive insurers are located overseas, usually in tax havens such as Bermuda and Guernsey. There are a number of captive insurers that are located in the UK and are authorised by the Financial Services Authority. Overseas captives are managed by local specialist companies who are usually part of a large insurance broking or underwriting group with a significant presence in the UK.
Where overseas captives (and other overseas insurers writing UK risks) are registered for IPT themselves, they may appoint another associated company based in the UK to act as their agent and to deal with their IPT affairs, or they can deal directly with us. (see IPT06300).
Audits of captives are the same as those for any other insurer. The number of transactions each year will vary. They may write a very small number of policies each year, although the risks covered may be very large with significant premium values. In this case all the policies may be written on a common date, and the company will render two or three nil IPT returns per year. Otherwise, the captive will write numerous smaller risks throughout the year, although the volume of transactions will not compare to a regular insurance company.
Given the limited number of policies written in a year you will, on most occasions, be able to carry out a 100% check. However there may be difficulties in ensuring that all the supporting documentation for the business of an overseas insurer has been made available in the UK, particularly in those cases where there are apportionments or de minimis considerations.
The records may be quite basic and may comprise:
- working papers including the basis of any apportionments;
- copies of debit notes;
- correspondence with the insured;
- copies of the schedules to the policy;
- in co-insurance contracts there may be a list of the allocated percentages by insurer from the lead insurer;
- perhaps a copy of the policy itself. However, in some cases a formal policy document may not exist as it is often considered unnecessary between related companies. In these cases the correspondence and captive manager’s files are the key records along with any schedules.
The essential record to obtain is the underwriting account. This account details premiums received and the risk to which they relate.
By contrast, some accounting systems are extremely sophisticated, the major part being located within the parent company accounting system. In this situation you may need to co-ordinate your assurance with the VAT officer.