Most Offshore Captives Look Much Better In Workers Comp Hard Market
Most offshore Captives look great in a Workers Comp Hard Market. For many years, I did not catch on to the concept of captives in the Workers Compensation market. As insurance and reinsurance markets start to harden quickly, I am of the opinion that all employers should take a look at this “hybrid” insurance.
Captives are so named as the policyholder owns the insurance company. This makes the insurance company “captive” to the policyholder.
There are several types of captives – I will not define all of them here. If you need a definition or have questions about any of these terms, please email me.
- Single Parent Captive
- Association Captive
- Group Captive
- Agency Captive
The only one from the list above that I wanted to comment on is the Rent-a- Captive. These are designed for smaller companies that could not afford a captive on their own. This makes the captive market appealing to almost any company that is searching for an alternative to their regular insurance policies.
There are quite a few reasons that captives will become more appealing for Workers Compensation coverage.
- Heavy and increasing premium costs in almost every line of insurance coverage.
- Difficulties in obtaining coverage for certain types of risk.
- Inflexible credit rating structures which reflect market trends rather than individual loss experience.
- Insufficient credit for deductibles and/or loss control efforts.
As you may notice, these are the four concerns that almost all employers now have to deal with on at least a yearly basis. Captives are not the cure-all for what ails companies presently. They do offer a great alternative.
Interestingly enough, the three top domiciles are Risk Management technique for shifting portfolios of loss. Bermuda, Cayman Islands, and Vermont. Vermont was the first state to involve itself with captives. Those three domiciles represent 47% of all captive domiciles. The captives’ domiciles is basically its primary jurisdiction. The captives are subject to a yearly audit by a consulting actuary.
The two best benefits of an offshore captive are cost and flexibility. I have some reservations about the TPA’s that are used by some of the captives. They were somewhat lacking in a few areas whenever we audited the TPA’s claims handling and reserving. The file reserves are more important with a captive than with a regular insurer. As I commented earlier this week, the captives have to be large enough or well-reserved enough to not violate the Law of Large Numbers. A captive is a much smaller entity than a regular insurance company. That is why the file reserves are beyond critical and the actuary must be very accurate on his/her reserve projections for the next 10 years. Choosing a TPA and actuary are very important to the survival of the captive and its member(s).
The most surprising development occurred in 2007 – 2008. I had thought the IRS was not going to allow the tax-advantaged basis on the reserves in a captive. The IRS did almost a complete reversal and ruled that captives should retain their tax deductibility. I think they realized they could crash the whole insurance market if they all of a sudden ruled that captives were to be fully taxed.
This is much more to captive insurance arrangements. I tried to provide a quick summary. If you have any questions, please email us.
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