Managing Corporate Risks Via Captives

Author:Labuan IBFC Inc.
Profession:Labuan IBFC Inc
 
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Aricle by Anthony Egerton

At the Jakarta chapter of Labuan IBFC's 25th Anniversary ASEAN Roadshow, Anthony Egerton, Principal Officer at Huntington Underwriting Limited, discussed the benefits of managing corporate risk via a captive. Below is a summation of his presentation.

Introduction

Globally, a captive insurer, or captive for short, has become a mainstream risk management tool for many large organisations. In fact, more than 75% of Fortune 500 companies worldwide operate with established captives today. This translates into billions of dollars' worth of premium flowing through close to 7,000 captives worldwide.

According to Anthony Egerton, Huntington Underwriting Limited's Principal Officer, Labuan IBFC has become an attractive destination for these organisations to set up a captive because of its tax efficiency. However, he strongly advises against organisations starting a captive solely for tax reasons.

The former Asia-Pacific President of specialist insurance market, Lloyd's of London, shared his experience with a presentation on 'Managing Corporate Risks via Captives' at Labuan IBFC's 25th Anniversary ASEAN Roadshow in Jakarta.

He explained: "You have to identify and understand what risks are exposed to your organisations, entities and associations. Think about the risks you're happy to incur, and the ones you want to transfer, mitigate or manage in a different way. Once a thorough enterprise risk management assessment is done, you can think about using a risk management tool like a captive."

So what is a captive insurer?

A captive insurer is an insurance or reinsurance entity wholly-owned directly or indirectly by an industrial, commercial or financial entity. It provides insurance or reinsurance coverage for the risks, assets and liabilities of its parent company.

While the parent company determines the amount of risk that its captive assumes and how much it transfers to other parties via reinsurance, it will often appoint a specialist, manager, accountant or administrator to manage the affairs of the captive.

Types of captives

There are four types of captives:

Pure captives These are single parent companies that underwrite the risks of their owner, which is either a single owner or an affiliate, exclusively. Group and/or association captives Insurance companies or risk-bearing entities owned by a group or association. For example, in the marine insurance business, P&I (protection & indemnity) clubs gather ship owners to mutualise certain liability risks together. They collectively own the insurance entity. Rental captives These captives are facility structures established by a manager or a third party, which are then rented to third party organisations...

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