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CAPTIVES

UNDERSTANDING CAPTIVES

Over the past years, as insurers have faced increasing deductibles, restricted coverage
and higher prices for the risk transfer that is available, the focus on alternative risk
finance has increased. The term "alternative risk finance" encompasses various non-
standard approaches to dealing with hazard risk, among them: captive insurance
companies, finite risk "insurance," catastrophe bonds, contingent equity/debt, and
derivative risk transfer. The most common form of alternative funding sought by clients
is Captives as they can play an integral role in the successful implementation of a global
risk financing strategy. Reasons for forming a captive may include: lack of capacity in the
market; improved cash flow; insulation from fluctuating costs in the market; control of
claims and risk control services; lower long term costs by not being subject to the
commercial market overhead, profit, premium taxes, etc. These reasons, among other
things, will determine the structure best suited to your needs.

The simplest form of a captive is a "pure captive" which is a wholly-owned insurance

subsidiary that writes predominately the risks of its owner. It is an insurance company
that is owned by its members or insured, and is usually domiciled in a specialized
location, either onshore or offshore. It is not intended to underwrite or accept the
exposures of unrelated organizations. Captives are a more formalized vehicle for pre-
funding the cost of retained risk. Benefits to be gained from this approach include
increased overall control of your total risk management program and its various
components. In addition, under a captive program, underwriting profits and investment
income from premiums are returned to the participants or sponsors.

Association captive is a captive insurer that only insures risks of the member
organizations of an association and the affiliated companies of those members. This
type of captive is designed to serve a single industry.

Risk Retention group (RRG) is a form of captive that is an associated captive that has
elected to establish itself as a Risk Retention Group under the aegis of the Products
Liability Risk Retention Act of 1981, as amended by the Liability Risk Retention Act of
1986. The Act provides that a special purpose insurance company, organized to
underwrite the liabilities of an association, may do so on a nationwide basis after it has
become chartered and licensed in one state.

Rent-a-captive programs deliver similar benefits to other types of captive structures

without capitalization requirements or hands-on involvement in overseeing the captive
program. It is organized by a sponsor to offer a facility to other organizations seeking
the benefits of a captive but not wanting or able to form their own. This program may
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also afford certain tax and regulatory advantages that aren't available through other
alternative market mechanisms.

Agency captive is a captive insurer that is owned by an insurance agency of brokerage

and that only insures risks of policies that are placed by or through the agency of
brokerage.

A group captive can be formed from companies sharing a common industry or

demographic profile, or from a group of diverse companies sharing the same risk
management philosophy. The group is able to obtain customized claims management
and loss control services, in addition to receiving the financial rewards inherent in a
captive program.

WHY KRAUTER CAPTIVES?

Choosing the location of your captive is critical. Krauter & Company will evaluate your
firm's goals, risk strategy, its geographic location, infrastructure, various tax structures
and treaties of each domicile to assist you in identifying the most appropriate domicile.
Our knowledge in the areas of cost allocation methodologies and captive support
services will provide you with the on-going expertise you need to support your unique
situation.

MORE INFORMATION? CONTACT US.

For more information about Krauter & Company’s Captives’ capabilities or professionals,
send your request to: info@krautergroup.com.