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Legal Variations

Part of deciding if a captive insurance company makes sense for you is understanding the most common types, how they are being used today, and why certain types make sense over others depending on your goals and objectives.  

To view a diagram showing how a captive entity "looks" from a legal relationship and design viewpoint, click on the applicable type you are interested in: (a) pure captive or (b) series llc captive (cell captivesd have similar diagram view).

When forming a captive basic legal decisions must be considered including but not limited to:
  • what type of entity will the captive be (a new corporation, a cell of an existing corporate structure, a series of an existing entity structure, or some other legal entity?;
  • will the preferred domicile for your captive allow the legal entity type you prefer to be licensed as a captive insurer?;
  • what ownership structure is desired - do you want to achieve asset protection and asset transfer objectives?;
  • is the domicile most suitable for the captive entity also the domicile most suited for the entity that owns the captive?;
  • in forming these entities, electing responsible parties to act,  and in issuing ownership interests in them, what types of collateral documentation is needed to have quality corporate governance?;
  • what is any US, state and other jurisdictional securities regulations may apply and what procedure and documentation is indicated to comply with these rules? 
Too often today the above scope of legal analysis is lacking in forming new captives due to the consultants and advisers involved not having sufficient experience to address the above range of issues.  Emphasis is generally focused only on the form of captive entity itself and a reasonable domicile that will efficiently accommodate the captive business plan.

The type of captive (and the domicile selection) has significant legal, tax, accounting, regulatory and operating cost and complexity implications.  Surprises are not uncommon for most new captive owners.

Common Captive Types
Captive Types Defined and Differentiated

Pure Captive - (sometimes known as "Single Parent Captives")
  • Pure captives insure only the risks of related companies (parent, affiliates and controlled unaffiliated businesses). This is the most common type of captive in use in nearly every industry around the world. Whether a captive has a single owner or not has no bearing on whether it is a "pure" captive. Its legal purpose and scope determine its proper characterization and whether a domicile's laws are a good fit.
Agency Captive
  • Owned by one or more licensed insurance agencies or brokers to reinsure their preferred client risks.
Industry Group Captive
  • Two or more owners (profit or non-profits) who form a captive to insure similar risks usually in the same industry.  Group captives are common to share the cost of captive formation and operation. Most US domiciles require group captives to be pure, to not write any unrelated business.
Association Captive
  • Sponsored and owned by a trade, service or industry association for the benefit of its members. Association captives make sense when sufficient member interest and commitment exists or when needed insurance is not readily available or affordable in the marketplace.
Risk Retention Group (RRG)
  • RRGs are a special category of captives that operate much like group or association captives but under special federal legislation allowing operation in all 50 states even though licensed only in the state of domicile. RRGs have been widely used to cover professional liability risks, particularly within the healthcare industry by service providers. RRGs are generally the most involved captives in terms of operational complexity, cost and regulatory oversight and review. 
Rent-A-Captives (RAC)
  • RACprovides 'captive' facilities to non-owners for a fee and use internal structures to isollate participant's risks. They are often used for programs too small to justify a separate captive's new capitalization requirements, administrative costs and management complexity. RACs are generally structured as cell captives.
Segregated Portfolio or Protected Cell Captives (SPC or PCC)
  • SPC and PCC captives generally have a sponsor who provides the start-up capital and expertise. Participants liability and risks are segregated contractually. These types of captives generally require more initial capital than other captive types. Non-US jurisdictions innovated cell and segregated portfolio captives. Many US domiciles recently enacting supportive statutes due to the value and increasing popularity of cell captive structures. PCCs essentially bring the value of captives to a larger customer base that could not afford or justify forming independent captives.
Series Limited Liability Company Captives
  • SLLCs are a new legal hybrid. They are similar to protected cell captives. While 11 US states as of 2012 allow series structures, Delaware leads in US formations of series captives (known as SBUs).  Series LLC's compete with more traditionally designed segregated cell or rent-a-captives. Delaware Series LLCs are very cost effective applications and easily compete with offshore jurisdictions that typically require less minimum capital than their US counterparts. Series LLCs now seem to lead the growth in domestic 831(b) captive applications.
Special Purpose Vehicles (SPV)
  • SPVs are specialized captive reinsurance companies used to create alternative finance sources to cede (layoff) portions of your risk portfolio to 3rd parties, usually investors in the capital markets.
Other Types
  • Captive insurance companies with similar attributes are sometimes given different names between domiciles. Due to the global nature of the captive industry, there is no standardization. Even the various US states enact statutes with variations. So legally speaking there are many types of captives authorized and given various names not referenced here.
Click here to view a simplified chart comparing Rent-A-Captives to Cell Captives to Series LLC captives.

See "Key Terms and Definitions" for more information. 

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