WIN Magazine - Summer 2015 - (Page 15)
Why you Might Want to
By roBErt h. myErs, Jr.
an agency captIve
Or YEarS, MaNY
have created captive
insurance companies to participate
in their customers'
risks, generate investment income,
smooth out the swings in their
income, and better align their interests with those of their customers.
It seems like such a "win-win" situation. Why don't more agents do so?
WhAT Is A CApTIvE?
A "captive" is an insurance company
chartered under the captive provisions
of any jurisdiction-either onshore
or offshore-which is designed to
insure the risks of its owners. There
are numerous forms of captives: single
parent ("pure"), group or association,
special purpose vehicles (SPVs), risk
retention groups, segregated cell or
protected cell, or agency captives. An
"agency captive" is generally defined
as a single parent captive owned by
an insurance agency which takes
a portion of its customers' risk by
reinsuring a portion of that risk,
either on a quota share basis (most
common), on a layer, or even stoploss basis. This form of captive is also
sometimes referred to as a producerowned reinsurance captive or "PORC."
A number of agencies can cooperate
in the ownership of such an entity,
which would create a group captive.
A segregated cell or protected cell captive can also provide the reinsurance
capability for the agency or agencies.
Not all U.S. or foreign domiciles allow
for these variations. Some do not allow
agency captives at all.
In order to form a captive, a team
of professionals should be assembled,
including a captive manager, an
actuary, an auditor and an attorney.
Each of these should have experience in the captive industry. This
team will help the agency select the
form of captive and domicile most
suited for its particular needs. The
capitalization required is generally
modest-usually between $250,000
and $400,000. This is the statutory
capital and surplus which will need
to remain in the captive for its life.
Additional surplus and reserves, of
course, will be needed in proportion
to the risks assumed. Certain forms
of cell captives, known sometimes as
"rent-a-captives," provide the necessary capital and surplus for a fee.
The ownership structure generally
follows two forms: share ownership
or contractual control. In the former,
the agency will own shares, which
can be either common or preferred.
Under some laws, if a cell arrangement is chosen, the cell can either
be incorporated or unincorporated.
Under the contractual form, the
rights and duties of the agency are
established in a contract with the cell
company, generally known as a "participation agreement." The captive
formation process generally entails
a meeting with the regulators, preparation of a detailed business plan,
creation of five-year pro formas for
the captive or cell, and submission
of organizational documents such as
articles, bylaws, subscription agreements, shareholder agreements, etc.
W I N | S u m m e r 2 0 15 | 15
Table of Contents for the Digital Edition of WIN Magazine - Summer 2015
Why Inspections Matter: Ascertaining the True Liability of the Risk
Why You Might Want to Consider an Agency Captive
AAMGA 2015 Winning White Papers
Why the BP Macondo Gulf Blowout is Important…and It’s Not What You Think
Terrorism Risk: Industry Challenges & Opportunities
Cyber Warfare: An Emerging Market for the Excess and Surplus Lines Market
The Genomic Revolution: Where Does Insurance Play a Role?
WIN Magazine Marks Fifth Anniversary: The Voice of the Wholesale Insurance Network™
Education, Networking and Leadership: Wholesale Insurance Professionals Gather at AAMGA’s University East
In the WIN-ner’s Circle: An Interview with Matthew H. Letson
Index of Advertisers
WIN Magazine - Summer 2015