Where family wealth is derived from an active business, captive insurance can provide significant opportunities to retain and transfer that wealth to other members of the business owner’s family, said a recent article.
Katharina Byrne of law firm Burges Salmon LLP has published commentary on wealth planning using captive insurance, which stated that the structures could provide opportunity for funds that would otherwise have been paid to a third party to purchase insurance cover, to be retained within the family—either by the business owner, an associated company, or a trust set up for the benefit of the owner’s family.
The positives of using captive insurance as part of an estate plan, said Byrne, are lower insurance costs, access to the reinsurance market, better cash flow, tax advantages, and good coverage.
“The use of a captive insurance company can result in a potential reduction in insurance costs,” said the article.
“The costs of commercial market insurance takes into account the claims, overheads, and profit retained by the insurance company. In the case of a captive, the profit will remain with the business of the owner, in effect allowing the owner to share in the underwriting profit on its own insurance. A captive may also reduce insurance premiums by charging a premium that more accurately reflects the claims history of the parent/owner.”
Byrne added that reinsurers are the international wholesalers of the insurance world, and that the captive’s ability to deal directly with reinsurers can produce additional cost savings. “The reinsurance market can also have additional capacity and a willingness to insure more difficult risks”.
She also commented that a captive may be able to provide insurance coverage where none is available in the commercial market, or only at a prohibitive cost.
“Captive insurance can also be used to fill gaps where commercial insurance providers will not provide cover, or where the cost is uneconomic: it rarely replaces commercial insurance. Common areas of risk that can be included in a captive are the deductibles and exclusions of the business’ commercial insurance cover."
"Other risks that are often uninsured by commercial policies but could be covered by captive insurance include business interruption, loss of key customers, credit default, extended warranty claims, directors and officers, errors and omissions, litigation defence, construction defects, pollution and natural disasters.”
A captive may also be worth considering for more specialist coverage that is not necessarily connected to a business, for example, to insure an art collection, she said.
As well as cash flow advantages, a captive may prove to be a more tax-effective approach than simply self-insuring on a formalised basis, said Byrnes.
“The extent of this advantage will depend partly on the tax residence of both the captive and its owners. Generally speaking, arm’s length insurance premiums of captives, as with any other insurance company, are an allowable expense for tax in the country from which they are paid.”
