August 05, 2014

This reply from John O'Brien, recently retired from Wilmington Trust. Contact R. Brian Flinchum, 302-636-6062 or [email protected] for more information.

Captives as alternative risk vehicles have come into style first off shore and now on shore in a very major way with captives in the hundreds being formed each month in jurisdictions like Vermont, Nevada and South Carolina. Many of our captives actually come as referrals from accounting companies such as yours. The business process for your company would be to assist your clients in formulating business plans and preparation of financial material for entry of your clients into the alternative risk market through a captive.

There are many, many types of captives, but the basic or pure captive is one that insures the risks of the parent or controlled unaffiliated business. Better than fifty percent of major corporations' risk business involve placement in alternative or captive vehicles. But in order to have a captive, the company must become a licensed insurance company in a jurisdiction that permits the company to form its own insurance company. A captive management company will work with you and your client to situate this captive in the proper jurisdiction and complete the application before the insurance regulators in the jurisdiction. The captive feasibility study is driven by finances, insurance costs savings, and often times tax considerations.

After the captive is formed, the captive management company manages the captive under the jurisdiction of the insurance regulators and, yes, this is where audits both by independent accounting firms as well as the insurance departments come into play. Typically, there are annual independent audits of the captive, an organizational audit, as well as three-year department audits which many times are outsourced. With the growing number of captives, this captive auditing field is a growing and thriving industry and worthy of accounting firms' consideration for business opportunities.