Captive insurance refers to the situation where a parent company or a group of companies creates a licensed insurance company to insure itself. If you are not familiar with captive insurance, this may sound strange, but actually it is a legal and effective means of gaining tax benefits, asset protection, and often better insurance coverage. Interest in forming insurance entities in The Bahamas has grown in the past few years due to increasing insurance regulation in other jurisdictions, changes in U.S. and Canadian tax laws, helpful and innovative Bahamian laws, and the need for new products to attract banking customers to The Bahamas. As a result, the number of companies using captive insurance has increased greatly.
Captive insurance companies insure the risk of their owners, unlike typical insurance companies, which insure non-owners' risk. Today, many captive insurance companies also deal in reinsurance, doing business with third parties rather than just their owners. Captives are common in a wide variety of industries. For example, there are medical captives (set up by a group of doctors), family captives (set up by a wealthy family for its members), and association captives (set up by a group of businesses in the same industry). Captives can write different types of insurance policies for their members, including but not limited to property, casualty (such as general liability, worker's compensation, malpractice, auto, etc.), life, health, and employment practices policies.
There are a few different types of captives. Single parent captives insure only one parent company or its affiliates/subsidiaries. Group captives are owned by several different unrelated companies to pool risk. Any losses are shared among the group members, but a group captive has more predictable results than a single parent captive. Association captives are started by industry, trade, or service groups to serve members.
Another type of captive, commonly called a segregated cell captive or a “rent-a-captive”, is called a Segregated Accounts Company in The Bahamas. See Segregated Accounts Companies Act, 2004. Essentially these captives have a core unit that is not subject to risk and various cell units that are subject to risk. Each of the cell units' assets and liabilities are segregated from those of the other cell units. Businesses who do not have the time, money, or inclination to create their own captive insurance companies often use Segregated Accounts Companies instead. These businesses take ownership of the assets held by the Segregated Accounts Company via a participation agreement or a non-voting preferred share.
Companies interested in starting a captive insurance company in The Bahamas will need to follow a few, somewhat detailed steps. They should prepare a business plan and feasibility study, meet with the Insurance Commission of The Bahamas, engage service providers (managers, legal, banking), submit their application (including a detailed business plan, due diligence documents, and actuary report), wait to receive a license and incorporate, then finally begin operations.
To learn more about captive insurance, visit Gonsalves-Sabola Chambers online or call the office at +1 242 326 6400.