A.R.T. Information

A.R.T. Information

Understanding the sophisticated insurance structure involved in most Alternative Risk Transfer (ART) programs is challenging for many risk management professionals with minimal experience in the ART approach to managing corporate risk. Alliance National has created the following information resources for our current and future policyholders to review in the early stages of an evaluation of an ART insurance.

Frequently Asked Questions About Captives

Key questions to consider before forming a Single Parent Captive:
What are the basic types of captives?
About what size does a company have to be in order to form a captive?
What are some of the business reasons companies form captives?
What are the basic costs for establishing and operating a captive?

Key questions to consider before forming a Single Parent Captive:

Does your company have the financial resources and commitment for the formation of a captive?
Will the captive lower your insurance costs by eliminating unnecessary or redundant services and improved loss experience?
Are you finding it difficult to obtain insurance for adequate coverages at a reasonable price in the traditional market?
Does your company need insurance for its international exposures?
Does your company understand the importance of and effective loss control program for a captive?

top

What are the basic types of captives?
Single Parent
A single parent captive is an insurance company formed to provide insurance coverages to its single parent owner.

Group/Association
The group or association captive is an insurance company formed to provide insurance to a group or association of owners. The member companies usually are from a related business field.
top

About what size does a company have to be in order to form a captive?
The size of the company usually depends on the coverages and limits of insurance to be written through the captive. In general, for a single parent captive, a company's annual insurance premium should be a minimum of $750,000. However, just about any size company can be part of an association or group captive.
top

What are some of the business reasons companies form captives?
Business considerations vary when evaluating the formation of a captive. Here are a few samples of business reasons:

Greater availability of insurance coverages at a more reasonable cost.
Use of a captive may have some corporate tax advantages (always consult your CPA)
Greater control of insurance costs, coverages and services
Better coverage for a unique insurance exposure.
The ability to tailor an insurance program to meets a given compnay's specific exposures.
Better loss control, tighter underwriting and more control over the handling and settlement of claims
More likely to have greater stability in the cost of insurance over time
Premium collected by the captive can earn investment income which accrues for the benefit of the captive owner(s) which can help a company's cash flow
Direct access to the reinsurance marketplace (good loss history leverage)
More immediate financial return for controlling the cost of claims

top

What are the basic costs for establishing and operating a captive?
In order to qualify for a potential tax benefit, the corporation or company will incur the cost of setting up and operating a captive insurance subsidiary. Annual fees for service providers (captive management, audit, legal, actuarial, etc.) can range from $50,000 to $150,000 or more. The captive will require capital (often obtained through letters of credit), pay premium taxes, and incur other expenses such as holding an annual Board of Directors meeting in the captive's domicile.

There are some less apparent costs to consider when forming a captive such as internal management time. The deductibility of premiums paid to a captive is open to challenge from the IRS (especially in recent years). Recent federal guidelines includes a provision that prohibits a captive owner from deducting premiums paid to the captive unless 50% or more of the captive's total premiums are from unrelated (third-party) risks. Due to more restrictive federal guidelines, corporations or companies should consult with its legal, tax and accounting counsel, and make its own decisions regarding its tax and accounting treatment of losses, premiums, investment income, etc.
top