Advantage Insurance Holdings
CIT talks rent-a-captives with Simon Kilpatrick of Advantage Insurance Management to see what the facility offers the industry
What is the history behind rent-a-captives? And why were they created?
Rent-a-captives have been around for more than 25 years and started initially as risk sharing pools or programmes where small- to mid-sized businesses that could not afford to fully self-insure could join forces with similar business to finance their risk. Initially, the participants in these arrangements shared risks with the other participants to varying degrees.
The evolution of rent-a-captives began to accelerate after Guernsey introduced the concept of protected cells in 1997. Protected cells allowed for the true segregation of assets and liabilities, which allowed participants a greater degree of comfort and control. The concept of segregated cells has taken off with most captive domiciles having some form of cell legislation in place. The latest changes in the industry include the capability for segregated cells to incorporate themselves, which allows for them to take tax specific elections and further strengthens the segregation of risks and asset protection between the various cells.
How does Advantage’s rent-a-captive facility work?
We have two rent-a-captive facilities so that we can provide both an onshore and offshore option. Chesapeake Bay Insurance Company is a Washington DC-based agency protected cell company. Customers can purchase certain insurance directly from Chesapeake or they can form a cell within it to offer the coverage.
In the Cayman Islands, Advantage Property and Casualty SPC can create protected cells that can direct write or act as reinsurers depending on the client’s needs. For both companies, we provide all of the back-office administrative support including policy design, accounting, corporate activities and regulatory reporting. Clients can provide their own capital to their cells or rent capital from us.
How might this structure benefit companies?
Rent-a-captives offer companies many of the same benefits of traditional captives including the ability to participate in their underwriting profitability and in the investment income generated by the premium dollars. Additionally, captive owners have the ability to custom design coverage and have more say in the claims handling process. The fact that they are now self-financing their risk often leads to lower claims and losses as a result of improved safety practice. Lower losses can mean a lower overall cost of risk financing for the business.
What requirements does a company need to set up a rent-a-captive? Do these differ across domiciles?
The requirements differ if one is creating a cell or joining an existing pool. Joining a pool is very easy as no additional licences are required. Once the underwriting and due diligence requirements are met, the policy can be issued.
Creating a new segregated cell is more involved as the cell typically seeks to get its own certificate of authority or licence. This requires an application to the regulators that is substantially similar to that of a standard pure captive. The requirements for licensing differ slightly between the domiciles, but we are seeing that these standards are becoming more similar all the time.
All regulators want to see evidence that the cell’s business plan has been clearly thought out and designed to last in the long run. Financial pro-formas should indicate that the cell has a likelihood of financial success and these may often need to be supported by an actuarial study that projects the expected losses under expected and adverse scenarios.
Why would a company opt for a rent-a-captive over a pure one?
The primary reason for joining a rent-a-captive is economies of scale. Companies that are not large enough to form their own captives can rent the services provided by the captive manager, auditors, actuaries, etc, at an incremental cost.
Additionally, if the company was looking to solve a short-term problem by self-insuring, then a rent a captive avoids the long-term commitment required to create a pure captive. A rent-a-captive also provides a good stepping-stone or incubator where the company can test the waters before taking the plunge into the creation of a standalone captive.
Do rent-a-captives cover the same risks as pure ones?
Rent-a-captives provide a high degree of flexibility. If something can be done with a standalone captive, it could most likely also be done though a rent-a-captive or segregated cell. However, the rent-a-captive model may not always be the optimal method. Just as with pure captives, certain statutory risks would require the captive to utilise a rated and admitted front company. Captives don’t typically write risks such as property and personal lines.
What are the downsides to the structure?
Pure captives are completely autonomous and control every aspect of their operations, whereas rent-a-captives typically limit the ability of their cells to make these decisions. Participants in a rent-a-captive typically cannot choose as freely who their service providers are. They are often forced to use the auditors and actuaries that are hired by the owners of the rent-a-captive facility. There may be limitations imposed by the rent-a-captive on the type of investments the cell can make and there may be less flexibility on the types of coverage that can be written.
How do regulators view rent-a-captives compared to traditional captives?
The majority of the major domiciles have updated, or are currently in the process of updating, their segregated cell laws. The trend is to allow some form of incorporated cell and to more clearly define how cells can interact with one another.
These changes seem to indicate that the rent-a-captive and segregated cell captives are still looked on as favourable captive structures by the regulators. That said all captives, including rent-a-captives, are judged on their financial health and stability as well as how they operate and conduct themselves in the marketplace. As rent–a-captive participants leave a lot of those details up to their owners and operators, it is very important for companies to conduct a thorough initial review to ensure that the rent-a-captive is in good standing in its home domicile.
