Captive Guide
What is a captive?
A Captive is a legally licenced insurance or reinsurance entity. Its business is primarily supplied by and controlled by its owners, which are also normally the principal insureds. These owners/insureds participate in controlling the underwriting, claim and investment decisions of the insurance company.
The Role of a Captive in an organisations’ Risk Management strategies include:
- Establishing a centralized risk framework.
- Creating tailored, comprehensive and responsive coverage.
- Improving claims handling and monitoring.
- Potentially reducing the overall cost of risk.
- Potentially increasing the cash flow of the combined business enterprise.
What is a captive?
A Captive is a legally licenced insurance or reinsurance entity. Its business is primarily supplied by and controlled by its owners, which are also normally the principal insureds. These owners/insureds participate in controlling the underwriting, claim and investment decisions of the insurance company.
The Role of a Captive in an organisations’ Risk Management strategies include:
- Establishing a centralized risk framework.
- Creating tailored, comprehensive and responsive coverage.
- Improving claims handling and monitoring.
- Potentially reducing the overall cost of risk.
- Potentially increasing the cash flow of the combined business enterprise.
Companies with some of these attributes should seriously consider forming a captive:
RM2,000,000 or more or equivalent in annual Property and Casualty insurance spend
Proactive approach to risk management
Long-term commitment to risk financing
Strong financial balance sheet
Appetite to finance retained risk
Risk Management
Data driven qualification of risk to aid in managing risks, resulting in positive risk management.
Control On Insurance Programme
Able to control and select the most relevant type of coverage/ insurance without having to succumb to off-the-shelf packages offered by conventional insurers.
Captive Reserve Pool
Ability to establish reserves from unused premiums for investment purposes.
Risk Finance Optimisation
Enabling the insured to create a threshold for risk tolerance so that the organisation can determine how much risk it can take without affecting KPIs.
Cost Efficiency
Despite being guided by the principal of arms-length pricing, cost efficiency can still be optimised by way of a lower operational cost by Captive company.
Reinsurance Market
Allows access to the reinsurance markets for specialty risks.
Cash Flow Optimisation
Premiums paid over time to the Captive will generate a cash surplus which can be deemed as a secondary source of cash-flow, adding value to the parent company.
Tax Optimisation
Optimising underwriting profit under a lower tax regime is also one of the advantages of utilising captives.
Is a Captive right for your business?
Setting up a Captive is a long-term commitment. Considerations include:
- Capitalisation
Labuan Regulations require a minimum capital of up to RM 500,000 for captive rentals and RM 300,000 for pure single captives
- Type of Captive
Apart from the Capital requirements, if your annual insurance spend exceeds RM5,000,000, a pure Single Captive will make sense, although it will also depend on the level of resources that your business is able to put in place. As mentioned, a captive works just like a regular insurance company and therefore staffing requirements will need to have the right skill set to manage the captive efficiently.
Other decisions and consideration would include ownership structure, type of coverage to be underwritten by the Captive and any other regulatory requirements to consider in your insurance arrangements, a feasibility study should be conducted to study your business profile, along with a review of the insurance market conditions and an assessment of regulatory, legal and tax issues for your business.
To know more about Captive, please download our Captive Guide.