CAPTIVE INSURANCE COMPANIES

• A captive Insurance Company is a wholly owned or controlled subsidiary company formed by a non-insurance parent (or association of companies or individuals) for the purpose of participating in the risk of the parent enterprises or its group (subsidiary or associate).  The risks assured can be those that can be insured in the normal way, or those for which insurance coverage is difficult to obtain or highly costly.

  Captive Insurance Companies is regulated by the provisions of the Insurance Companies Law, and may be registered in Cyprus as international business companies under certain provisions and requirements.

• The Captive Insurance Companies must comply with the Insurance Company Law and in particular with the following:

(i) The minimum paid up share capital must be C£10,000.00.

(ii) Full compliance with the provisions of the Insurance Law as to the filing of the accounts and other relevant documents (the Council of Ministers may allow certain modification of this requirement).

(iii) Adequate cover to the satisfaction of the Superintendent of Insurance, regarding claims from third parties, that these claims shall rank in priority to the claims of any other company in the group.

• Besides the usual benefits and advantages available to international business companies, Captive Insurance Companies may gain the benefit of obtaining insurance at lesser net cost and have a flexibility which can be related to all aspects of the sponsor’s risk management programme.

Other reasons for setting up a captive are:

1. A Corporation may believe that the commercial market is charging too much for a certain line of coverage when compared to the loss experience.  Establishing a captive to write this business could substantially reduce cost.
   
2. Just as in a homeowner’s policy, corporations are carrying large and larger deductibles on their policies.  The losses within these deductibles, however, do not go away and have to be provided for.  A captive is an ideal way to do this.
   
3. Some lines of coverage, such as workers’ compensation, are mandated, as are the premium levels.  A Corporation with good loss experience in these lines may wish to write them in a captive.
   
4. Substantial investment income can be generated in a captive by holding onto the premiums until the losses are settled.  In lines such as medical malpractice some losses can take 15-20 years to settle, which means considerable interest can be generated on the premiums.
   

There are just some of the reasons for establishing a captive.  The USA and UK are some way ahead of the others in this area but mainland Europe and Far East are catching up fast.

The industry has of course become extremely complex and now includes multi-parent or association captives and extends to every line of business including medical malpractice, workers’ compensation, auto liability, general liability, products liability, errors and omissions, property and marine.