Bermuda – Captivating for Sure..! – Part 2

As discussed in the part one of this article, Bermuda has made a name for itself in terms of domiciling captive insurance businesses. This means that a lot of these ‘strange sounding’ insurance companies have chosen Bermuda as their registered jurisdiction. This is mainly based on the fact that the ‘godfather’ of captive insurance, Mr. Frederic M. Reiss, who invented the concept in the 1950’s, needed a jurisdiction, in which his plan would be legal and easy to execute. The United States, therefore, where a no-go and due to its geographic location and stable political climate (British Dependent Territory) Bermuda seemed perfect.

This trend has continued and to this day Bermuda is home to captive insurance companies, who almost exclusively belong to major US corporations. Very much like the booming offshore or international business company market, other jurisdictions, such as the Cayman Islands, have tried to attract this industry, however, its those jurisdictions who provide the best legislation in terms of claim payments, which have proven most successful at this. 

We have already discussed that the general purpose of captive insurance companies is to insure a risk, which might be unique to a company’s day-to-day business enterprise and therefore simply cannot be purchased commercially or is so rare that the few commercial insurance companies offering such policy ask an overprised premium, but that’s not all what these vehicles are good for.

It is true, the main purpose of the captive insurance is to save money on insurance and they do that like no other. As these companies underwrite the risk of the main business, any profits made on the premium payments, which otherwise would be swallowed by the commercial carriers, can now be retained and remain within ‘the family’. One more important aspect, however, is that by creating a captive insurance, you have effectively created a new business.

Captive insurance companies require licenses, which can be obtained from the jurisdiction’s regulator, a “Financial Services Commission” or similar entity. These regulators often issue more than just this kind of license, however. A captive insurance with sufficient funds can be converted into a commercial, a ‘general’ insurance company – licensing procedures in the jurisdiction of choice permitting – and offer policies to the general public or specialize in company policies.

A further reason for utilizing a captive insurance in a company’s risk management regime is asset protection. Each dollar you pay into your insurance company as a premium reduces the main company’s assets. If something unforeseen ‘hits’ your main business, the money, which was legally paid as a premium into your captive insurance, is out of reach of potential creditors. In order to access those funds, creditors would have to prove that you made a ‘fraudulent transfer’, which is virtually impossible to proof, as you’ve legitimately ‘bought insurance coverage’ from an external legal entity.