Captives, UMAs and other structures

Question 1

Advantages of using a captive structure for motor fleet

Answer 1

1. the net insurance cost would be lower as the captive would not be paying the expenses and profit margins loaded in the premium to an insurer
2. the captive can deduct the premium as a business expense, and build up reserves from pre tax profits
3. incentivizes improved risk management culture
4. better matching of timing of cashflows : being able to reserve for future claims from current funds thereby matching revenue and expenses for the same financial period
5. the captive may be allowed to cover other lines of business other than self insurance of the fleet to increase cost saving and further improve efficiency
6. This can be expanded to other related third parties
7. the type of cover required may not be available in the market
8. reserves for unpaid claims and unearned premium can be held by the captive, thereby earning investment income
9. tailored cover can be developed
10. tax advantages if the captive is set up in a territory where less tax may be payable
11. insurance profits can be paid back to the parent in the form of dividends
12. access to Lloyd’s and reinsurance market

Question 2

Disadvantages of setting up a captive for motor fleet business

Answer 2

1. upfront capital required to set up a captive
2. even if capital is available, comes at an opportunity cost
3. lack of internal expertise and reliance on consultants at additional costs
4. future running costs of the captive are uncertain
5. ongoing time and cost of managing the captive may not outweigh the saving benefit
6. risk experts may be distracted/overburdened by the captive and not focus on risk improvement that may yield higher benefits
7. no benefit from insurance cycle, i.e. hardening and softening of rates providing the opportunity to “shop around”
8. continuation of cover less secure than with a well capitalised insurer (CAT covers)
9. may be a true lack of risk transfer if no reinsurance purchased by the captive
10. takes focus away from core business
11. rates from reinsurers may not be favourable
12. not viable for smaller fleets