A captive is a wholly owned insurance subsidiary of an organisation not operating in the insurance business. Its primary function is to insure some or all of the risks of its parent company which may be a group of hospitals, for example. 

It is generally owned through a common interest which is not engaged primarily in the business of insurance. This interest may be a single-parent shareholder or a group of shareholders. 

A significant portion of the risks written are “captive”, related in some way to the risks of shareholders, or third-party risks which the shareholders control. In this respect a captive is an insurer that writes risks whose origins are restricted, or those risks to which it has unique access.

In the mid 1970’s, the professional liability markets were in a major crisis. The evolution of a sophisticated legal structure in the United States, and in particular developments in tort law, led to an unexpected increase in liability claims. The hospital systems were particularly affected, and the health administrators were becoming increasingly disillusioned with the spiraling number of malpractice suits. 

Out of this crisis, a prominent U.S. medical college developed the first Cayman Islands captive insurance company to provide coverage for their medical malpractice risks for their physicians. Given the success of this captive, other hospital systems soon followed, making Cayman a leading domicile for healthcare captives. 

Given the sudden development of this new area of business, a new regulatory framework was required to monitor this business and in 1980, the Insurance Law was introduced. 

Business is now spread amongst a diversity of companies ranging from small private shareholders to large public corporations. Types of coverage vary from worker’s compensation and product liability to life and annuity business. 

The newest industry trend is the segregated portfolio company, (SPC), known elsewhere as the protected cell company. This concept has developed from the rent-a-captive legislation wherein there is no legal distinction between each member. The SPC provides a facility for the legal segregation of funds. 

The primary policy, which provides coverage directly to the parent or stakeholders is usually assumed by the captive, while excess coverage would be purchased in the traditional market. Additionally, an umbrella or stop-loss policy would come from the traditional market. 

A fronted policy, which is coverage provided through the traditional insurance market, is utilised to cover the risks of the stakeholder group. 

• Insuring the uninsurable – provision of coverage not readily available in commercial market or for which market rates or conditions are prohibitive.
• Cost reductions – the offshore captive can reduce expenses such as administration and settlement of claims, loss control expenses, various state and federal taxes, brokerage commissions, and other acquisition costs and consulting fees.
• Risk retention, risk management and loss control – when a company has a better loss history than its industry average, the retention of its own risk can result in a lower premium.
• Cash flow benefits – through investment income and flexible premium payment plans.
• Tax minimisation or deferral – premiums payments by insureds to properly structured, adequately capitalised captive insurance arrangements are deductible for U.S. Federal income tax purposes.
• Access to the reinsurance market – direct access can result in reinsurance that is less expensive than conventional direct excess and umbrella coverage. There is also the opportunity to reduce costs by combining two or more lines of risk.
• Diversification into a profit centre – a captive is able to diversify into open market insurance operations and operate as a separate commercial profit centre. The captive can also generate profits from third party unrelated business.
• “Unbundling” of services – when a company is not satisfied with the technical services provided by its conventional insurer and wishes to “unbundle” risk control and claim handling services from the actual purchase of insurance cover.
• Reduction of government regulations and restrictions – includes a professional, yet flexible regulatory environment, widening investment opportunities and the facilitation of legitimate international movement of funds.

Single Parent Captive

This is an insurance or reinsurance company that only insures its parent of affiliated companies. 

Group Captive

An insurance company that insures or reinsures the risks of either a homogeneous or heterogeneous group of companies who may, or may not, be owners of the company. 

Association Captive

A company owned by a trade association and used to meet the insurance needs of its members

Agency Captive

A company owned by an insurance agency which utilises it to take risk on some of the business they place in the insurance market .

An umbrella or stop-loss policy

Coverage acquired by the captive in the traditional reinsurance market. 

Segregated Portfolio Company (“SPC”)

A company which acts as the “core” and various segregated cells which take on particular risks. The assets and liabilities of each cell are segregated from each other. Ownership of the assets in the cell can be by way of either a non-voting preferred share or through a participating agreement. This is a useful vehicle for those programs not large enough to set up their own captive or who do not wish to manage their own captive. 

Risk Retention Group (“RRG”)

A type of captive available in US domiciles which is an insurance company licensed under the Federal Risk Retention Act of 1981, as amended in 1986, which allows an insurance company licensed in one state to write business in all states without needing to get licensed there. An RRG is owned by its insureds and can only write liability business. 

The financial industry in the Cayman Islands is regulated by the Cayman Islands Monetary Authority (CIMA).
The Insurance Division is granted powers to regulate the insurance industry under the Insurance Law (2010 Revision) and is responsible for the supervision of all insurance companies in the Islands, whether they operate domestically as Class “A” companies or are Class “B”, “C” or “D” insurance or reinsurance companies accepting overseas risks.

• Highly developed professional services capability in insurance managers, lawyers, bankers and accountants
• Robust, commercially-minded regulation
• Freedom of investment management
• Reasonable capital requirements
• Freedom from various state regulations
• Political and economic stability
• An established, familiar legal system, based on English Common Law
• Effective crime legislation
• Possible tax benefits
• The absence of exchange controls, and the opportunity to transact business in any major currency
• Absence of income capital gains or other taxes
• Access to the reinsurance markets either locally or in major insurance centers
• Strong infrastructure and easy access to the jurisdiction