IN120 - Ownership Structures for Captive Insurance - Important Issues to Consider

The decision by a business to establish a captive insurance facility is normally influenced by issues relating to the insurance market such as:

• Control over insurance availability
• Costs
• Participation in potential underwriting profits

Once the decision has been made to progress with a captive insurance arrangement, there are other areas that require careful consideration:

• The ownership structure of the captive vehicle
• The domicile of the captive vehicle
• Taxation implications of the proposal

Ownership Structure of the Captive Vehicle
There are two main types of captive insurance vehicle, a separate captive company dedicated to one enterprise or a cell in a protected cell captive insurance company.

The use of a cell in a protected cell company introduces substantial cost savings with an element of control diversification over any one individual cell, as the core capital of the protected cell company is owned by third parties.

There is no single ideal means to own a stand alone captive or cell within a captive, each proposition has its own specific characteristics and needs to be examined individually.

The following factors are important to evaluate.

Control

The ownership of the captive vehicle and its share capital will determine the level of management control the owner can exercise over that captive vehicle.

Businesses with a Diverse Shareholding
The accumulated profits of the captive vehicle will be required to flow back directly to the insured business. Shareholders of this insured business will consider the potential profits from the captive vehicle to be part of their total investment return. In such a situation the shares in the captive vehicle would most effectively be held by the insured business.

Owner Managed Businesses
Owner managed businesses also have an option where, rather than the insured business owning the captive vehicle, the captive vehicle is owned by the various shareholders. This enables an effective split between the ownership of the economic benefits of the business and the captive vehicle, with potentially differing initial capital contributions and ongoing investment returns.

Taxation

The potential tax benefits are another factor affecting the ownership of a captive vehicle.

Where an onshore company owns a captive vehicle offshore, controlled foreign corporation (CFC) legislation may result in the profits of the offshore captive being assessed as part of the tax liability of the onshore company. This may or may not be desirable.

It may be possible for the shareholders of the onshore company to own the shares in the offshore captive insurance vehicle directly, avoiding CFC issues. However this option could potentially fall foul of other anti-avoidance legislation, which could impute a tax liability on the onshore owners of the business. An alternative may be for individual shareholders to hold their shares through tax efficient vehicles such as pension plans. This possibility is dependent upon the individual tax positions of the shareholders.

In cases where individual shareholders are resident in varying jurisdictions, or are able to take advantage of a beneficial tax position, such as UK resident non-domiciled status, there may also be options for tax mitigation or deferral through direct individual ownership, or ownership via other offshore structures.

Use of Captive Vehicles in a Treasury Function

Captive insurance vehicles can accumulate profits over a number of years. These profits can then be used as part of a group’s treasury function. The payment of dividends to the shareholders of a captive vehicle may therefore be secondary to the desire and opportunity to use the funds within the trading group.

Ownership Structure and Regulatory Approval

It should be noted that in most jurisdictions with captive insurance industries there is a requirement for approval of all captive insurance vehicles by the appropriate local financial services regulator.

This generally includes a review of the beneficial ownership of any captive vehicle, together with the ownership structure to be used.

It is therefore important when considering the type of ownership structure, to ensure that it will not raise any regulatory issues and to recognise that there will be a need for full transparency in the proposed structure.

Conclusion

This information note considers some important issues relating to the ownership of captive insurance vehicles.

It is important to take professional advice, not only in relation to the captive programme itself but also regarding ownership issues.

Further Information

Dixcart is happy to discuss these issues with advisers and their clients. For further information please speak to Alex Magell or Alan Corlett in the Guernsey office, or your usual contact.