This example illustrates a scenario that a business could use a rent – a – captive arrangement for their insurance programme

A large local manufacturing company has an insurance programme in place to cover their property, casualty, liabilities and they also have a basic employee health benefit insurance placed with a local insurer through their local insurance broker. Their annual insurance spend exceeds RM10mil with excellent loss experience. A new risk management team was formed to review the current risk management plans for the company and is tasked by the board of directors to have the risk managers see how the company can benefit from the excellent loss experience.

Alternatives considered and implemented solution

The team carried out some research on some of the possible alternatives for risk transfers and logically, the direction headed towards a captive insurance solution. However, steps will need to be taken to determine which type of captives would suit the company’s objectives. Using a Labuan Insurance Manager and several consultation meetings, a captive rental seemed to be a practical start. The process of forming a single owned captive would be complex and possibly costly in view of the recently imposed Substance Requirements for Labuan Companies engaged in insurance business activities (Labuan Business Activity Tax – Requirements for Labuan Business Activity Regulations 2018 on substance requirements. A captive rental insurance company was engaged, and a feasibility study was carried out.

It was important for the company to retain its current design of its insurance programme, with little or no change to their current claims services and therefore it was recommended that the programme should be designed as a fully fronted programme with a reputable and financially stable insurance carrier via the captive rental. Factors to support this decision included the confidence of the risk management team that improvements recommended to prevent losses at the manufacturing facility has been put in place. Following the analysis done on past claims, its finances and risk profile, the team determined that the company could comfortably retain the first RM3mil in aggregate of annual losses, excluding the health insurance programme, which is maintained with the current local insurer.

Under the captive rental agreement, the services will include resources in place to administer the programme with audit independently performed yearly. To kick start the captive programme, the company would credit the first layer of RM3mil risk retention to the captive and cede the exposure of the excess risks though reinsurance placement arrangements with the services engaged with the Master Captive owner.

Outcome and key benefits

With the annual crediting of the first layer to the captive, it is expected that the captive will benefit from positive underwriting plus investment income. As the fund size grows, this can be put towards assuming a larger share of risk in the future, applied towards reducing or redesigning reinsurance requirements, or taken back for the company’s reinvestment elsewhere.

This example illustrates a scenario that a business could use a rent – a – captive arrangement for their insurance programme

A large local manufacturing company has an insurance programme in place to cover their property, casualty, liabilities and they also have a basic employee health benefit insurance placed with a local insurer through their local insurance broker. Their annual insurance spend exceeds RM10mil with excellent loss experience. A new risk management team was formed to review the current risk management plans for the company and is tasked by the board of directors to have the risk managers see how the company can benefit from the excellent loss experience.

Alternatives considered and implemented solution

The team carried out some research on some of the possible alternatives for risk transfers and logically, the direction headed towards a captive insurance solution. However, steps will need to be taken to determine which type of captives would suit the company’s objectives. Using a Labuan Insurance Manager and several consultation meetings, a captive rental seemed to be a practical start. The process of forming a single owned captive would be complex and possibly costly in view of the recently imposed Substance Requirements for Labuan Companies engaged in insurance business activities (Labuan Business Activity Tax – Requirements for Labuan Business Activity Regulations 2018 on substance requirements. A captive rental insurance company was engaged, and a feasibility study was carried out.

It was important for the company to retain its current design of its insurance programme, with little or no change to their current claims services and therefore it was recommended that the programme should be designed as a fully fronted programme with a reputable and financially stable insurance carrier via the captive rental. Factors to support this decision included the confidence of the risk management team that improvements recommended to prevent losses at the manufacturing facility has been put in place. Following the analysis done on past claims, its finances and risk profile, the team determined that the company could comfortably retain the first RM3mil in aggregate of annual losses, excluding the health insurance programme, which is maintained with the current local insurer.

Under the captive rental agreement, the services will include resources in place to administer the programme with audit independently performed yearly. To kick start the captive programme, the company would credit the first layer of RM3mil risk retention to the captive and cede the exposure of the excess risks though reinsurance placement arrangements with the services engaged with the Master Captive owner.