Captive Insurance in the U.S. Virgin Islands

Captive Insurance Companies- What Are They?

A captive insurance company is, in its simplest form, an insurance company that only insures all or part of the risks of its parent. Captive insurers are often used to provide insurance for types of coverage not available in the regular insurance market or for types of coverage where regular rates are very high. They may write coverage on many lines. However, insurance for motor vehicles and personal residences are excluded.

Reasons for Forming a Captive Insurance Company:

The main drivers behind forming a captive company are risk management and risk financing.

Lower Insurance Costs: Commercial market insurance premiums must be adequate to meet the cost of claims but, in common with other commercial enterprises, insurers are in business to make money and will therefore include in the premium an element to provide for their acquisition costs, overheads and profit. This portion of the premium can represent as much as 35%-40% of the whole. In establishing a captive, the parent seeks to retain the profit within the group rather than see it go to an outside party. A captive may also help reduce insurance costs by charging a premium that more accurately reflects the parent's loss experience.

Cash Flow: Apart from pure underwriting profit, insurers rely heavily on investment income. Premiums are typically paid in advance while claims are paid out over a longer period. Until claims become payable the premium is available for investment. By utilizing a captive, premiums and investment income are retained within the group and, where the captive is domiciled offshore, that investment income may be untaxed! Additionally the captive may be able to offer a more flexible premium payment plan thereby offering a direct cash flow advantage to the parent.

Risk Retention: A company's willingness to retain more of its own risk, particularly by increasing deductible levels, may be frustrated by the inadequate discount offered by insurers to take account of the increased deductible and by the fact that the company is unable to establish reserves to pay future claims. Establishment of a captive can help address both these problems.

Unavailability of Coverage: Where the commercial market is unable or unwilling to provide coverage for certain risks or where the price quoted is seen to be unreasonable, a captive may provide the cover required.

Risk Management: A captive can act as a focus for the risk management and risk financing activities of its parent organization. An effective risk management programme will result in recognizable profits for the captive. Risk management can be viewed by a captive owner not as a cost centre but as a potentially profitable part of the companies activities. A captive can also be used by a multinational to set global deductible levels by enabling a local manager to insure with the captive at a level suitable to the size of his own business unit while the captive only buys reinsurance in excess of the level appropriate to the group as a whole.

Access to the Reinsurance Market: Reinsurers are the international wholesalers of the insurance world. Operating on a lower cost structure than direct insurers they are able to provide coverage at advantageous rates. By using a captive to access the reinsurance market the buyer can more easily determine his own retention levels and structure his program with greater flexibility.

Writing Unrelated Risks for Profit: Apart from writing its parent's risks, a captive may operate as a separate profit center by writing risks of third parties. In particular, an organization may wish to sell insurance to existing customers of its core business. For example, retailers may sell extended warranty cover to customers with the risk being carried by the retailer's captive. The claims pattern of this type of business is usually very predictable with a large number of small exposures and can provide the retailer with a valuable source of revenue.

Tax Minimization and Deferral: The tax considerations in forming a captive will depend on the domicile of both the parent and the captive. USVI captives are exempt from the USVI insurance laws, income tax and gross receipts tax. (Certain U.S. taxes may apply) Integration of a captive as part of an overall tax planning strategy is a complex subject so that professional legal and tax advice is essential.

USVI Domicile Benefits:

Although there are several domiciles to choose from when setting up a captive, the U.S. Virgin Islands is unique in several respects and as a result offers several advantages over other choices.

U.S. Employee Benefit Plans: The U.S. Virgin Islands is considered to be a state for purposes of the U.S. Employment Retirement Income Security Act (ERISA). This places the USVI in a unique position. Both a captive insurance company established in the USVI and a USVI branch of a US captive insurance company can insure employee benefit plans, which captives in Bermuda or the Cayman Islands cannot. For this reason, many captive insurance companies in Bermuda and the Cayman Islands are considering the establishment of exempt branches in the USVI.

Deductible Premiums: Premiums are deductible when paid to a captive insurance company, making the use of a captive insurer more attractive than self-insurance. No federal excise tax is imposed on premiums received for covering risks outside the United States.

A USVI captive insurance company can avoid this excise tax on premiums received for US risks as well, by making a special election to be taxed as a US corporation. A USVI captive insurer must maintain its principal place of business in the USVI, a requirement that can be met by contracting with a captive insurance management company. It must also hold an annual meeting of its board of directors in the USVI (a requirement to which few directors are likely to object!)

Lower Capitalization Requirements: A USVI captive can be formed by meeting a lower capitalization requirement than states such as Vermont have and by meeting low surplus requirements. Both requirements can be funded by a letter of credit from a USVI bank.

This firm is licensed and admitted in the U.S. Virgin Islands and is ready to answer questions and provide services to establish your USVI captive company.