Creating an offshore subsidiary to handle insurance perks can boost flexibility and reduce tax, but employers must be multi-nationals of the right size, says Jenny Keefe
If you read nothing else, read this …
- A captive is a wholly or part-owned, or rented enterprise designed to insure an employer’s own risks. There are between 4,000 and 5,000 in existence worldwide.
- In theory, employers can cover any insurance benefit with a captive, including private medical, critical illness cover and life insurance.
- The potential advantages of using a captive include cost savings, tax efficiencies and more flexibility, but launching one can be a time-consuming process for employers.
Are you sick of insurance companies ramping up premiums, turning down claims or simply refusing to insure your organisation? If so, then stop complaining and set up your own insurance company.
The notion is not as outlandish it may sound as employers have been setting up, taking a stake in or renting enterprises designed to insure their own risks since the 1950s. Known as captives, there are between 4,000 and 5,000 of these mini insurance companies in existence worldwide, according to Aon’s 2006 survey, Global 500: The captive picture.
Mark Cook, senior consultant at Towers Perrin, explains that while organisations have long self-insured property and transport risks, they are now starting to do the same with employee benefits such as private medical insurance (PMI). “One of the main reasons my clients use captives is cost savings. With a commercial insurance firm, if you have no claims at the end of the year, the insurer keeps the profit. With a captive you keep the cash,” he says.
Captives can be based offshore, in tax favourable domiciles. But employers should check to see whether the law in the selected domicile allows captives to be set up for the insurance concerned.
One key advantage of captives is their flexibility as employers are in the driving seat and can design their own schemes. For example, a commercial insurer might refuse to pay out on a PMI claim on the basis that an employee did not mention that they smoked occasionally when taking out the policy. An employer, however, can make an exception.
Other organisations use captives because they can’t obtain cover elsewhere. “Insurers might turn down a request for critical illness insurance for 200 top executives, but you can do it yourself,” says Cook.
So which employee benefits are captive-friendly? Markus Mende, senior consultant at Aon, says: “In principle, all risk benefits [such as] medical, life, disability, accident and death-in-service [insurance] can be covered through a captive.”
However, there are pitfalls, captives are more suited to large international companies than small UK-based firms. “It’s important as many subsidiaries as possible participate. Keeping the premium volume and number of people insured as large as possible stabilises the result,” he adds.
Captives are also high maintenance as employers take on all of the tasks of a regular insurance company, including the administration, underwriting, pricing and claims handling, although it is possible to outsource some of these tasks.
Cadbury Schweppes began the lengthy process of launching an international captive in 2003, to cover its disability, medical and life insurance schemes. Before the launch, it conducted a feasibility study, financial analysis and selected which countries would take part. Don Mackinlay, group remuneration and benefits director, says: “We adopted a phased approach; consolidation of administration of the plans to a single service provider is the primary stage. The next is to identify potential areas for captive involvement in the financing of the benefit programmes going forward.”
While there are still only a handful of employee benefits captives in the UK, Towers Perrin’s Cook expects more to follow in Cadbury’s footsteps. “Lots of big companies are becoming global, and a global strategy for risk is part of that,” he says.