Captive insurance companies

Abstract

Captive Insurance Companies are flexible financial vehicles that can be used creatively to address the financing of a broad spectrum of risks. Although these companies have become popular and a major topic of discussion in the insurance world over the last thirty-five years or so, their origins, as a matter of fact, go back to the late 19th century and early part of this century. Of the 3,300 captives in the world today, the vast majority were formed after 1950 and located away from their parent company's domestic environment to avoid complex insurance legislation and high taxation. However, the last few years have also seen an increasing move from formation in offshore locations to the onshore environment, mainly as a result of tax authorities becoming increasingly aggressive so far as the tax deductibility of premiums paid to captives are concerned and the taxing of profits as though the captive was resident in the same country as its parent. For example, in the United States, the state of Vermont has become a major competition to offshore locations owing not only to these tax considerations but also to the convenience of managing a captive in the same country as the parent. Malta has been careful to structure its offshore financial legislation to ensure that it appeals to companies of good standing. Indeed, the Maltese offshore legislation is aimed at attracting a wide spectrum of offshore activities including offshore banking, captive insurance, insurance broking, general trading and non-trading activities, offshore trusts and ship registration. As a matter of fact, for companies providing financial services or trading operations, doing business in Malta makes good business sense. Thus, I have chosen to concentrate my study on one very important area of the whole subject, i.e. Captive Insurance. I have divided my thesis into six chapters. The first chapter deals with the basic concepts of captive insurance companies in general whilst the second chapter deals mainly with the feasibility of captive vehicles. Consequently, the third chapter deals with captive formation and operating procedures, including management, reinsurance, fronting and underwriting. The taxation considerations for captives and their owners are dealt with in chapter four of my thesis whilst chapter five deals with domicile selection. Finally, chapter six is concerned specifically with Malta as a Centre for Captive Insurance Companies, including future developments.