Keep your captive options open: rent rather than own
To rent or to buy? This question has been asked by many homeowners over the years, and also by companies looking at captive insurance. There are many benefits to having a captive, but the process of establishing it can be daunting.
“You may not have the luxury of perhaps two or three months to set up your captive for your renewal.”
By renting, companies have easy access to the benefits of the insurance structure without the time, cost and longer-term commitment required when forming and owning a captive.
For insurance buyers, the motivations to rent vs own are analogous with similar decisions that we make when considering whether to lease or purchase a car, or whether to rent or buy that first apartment.
When we rent, rather than buy, some common motivations might include:
- Speed: you can sign that lease and move in.
- Flexibility and commitment: you won’t buy an apartment if you think you’ll be needing to move again shortly.
- Low cost to get in: one month down and you’re in. No big deposit or capital commitment.
- Speed and cost to get out: no attorney and real estate fees when you are ready to move out; you can leave when you’re ready without undue expense.
Equally, there are times to buy, such as when:
- You are ready to make a long-term commitment, have researched the neighbourhoods and are ready to establish a long-term base.
- You want to have the freedom to customise your living space and be free of any restrictions that a landlord may impose on you.
There is a right time for each route, so, back to captives. Interest in captives increases significantly during hard market conditions, such as is currently happening with commercial truckers’ auto liability coverage or property schedules undergoing significant change, with insureds receiving some tough renewal terms. Should you rent or should you buy?
It depends on your insurance buying and risk management objectives. The attractions of renting include:
- Easy in, easy out. It’s a fast and low-cost access to the insurance vehicle with the flexibility to exit as your needs suit you.
- Commitment flexibility. The insurance market is cyclical. If the interest is short term, perhaps for the next 12 or 24 months, with an uncertain commitment to retain risk when the marketplace becomes more competitive, renting should be considered.
- Renting allows you to exit without penalty, while an owned facility will require ongoing cost and maintenance until you dissolve your ownership.
- Sometimes speed matters, and you may not have the luxury of perhaps two or three months to set up your captive for your renewal and instead need to gain access to that vehicle within two to three weeks. In the absence of the need to undergo company formation, a rented captive provides quick access.
- Speed is not an uncommon need in current trading conditions for renewals requiring access to an alternative risk mechanism when the agent has exhausted more standard market options.
- Zero capitalisation. If you form an insurance company, you need to capitalise it according to the rules of the jurisdiction in which it is formed. Since these facilities are already established, licensed and capitalised by the facility owner, there typically is no initial capitalisation requirement for new cell renters—the company is already capitalised.
- Renters will, of course, be required to fund their cell appropriately with premium and security as required by their issuing carrier, facility provider and/or domicile regulator.
- Lower operating costs. Annual operating costs are typically lower for rent-a-captives than for your own company simply due to economies of scale. Renting fees are often in the +/- $50,000 annual fee range, versus ownership which typically costs in the +/- $100,000 range. Why? The facility has audit, legal, domicile and similar overheads being performed for the overall facility with costs spread across multiple cell renters.
- No formation costs. There is no formation involved, so there will be savings of anywhere between $20,000 and $100,000, depending on the type of captive.
There are certainly multiple occasions when captive ownership is more suitable. For the insurance buyer that is committed for the long term and desiring the fuller flexibilities that an owned company can be customised to fulfil, the added costs and commitments entailed in ownership can certainly be more than outweighed by those added benefits.
A rent-a-captive is a good first step to owning your first captive. Any insured requiring access to a captive mechanism but is not ready to commit the time and resources necessary to form a standalone captive should consider renting one and taking it for a test drive.
Martin Hughes is EVP underwriting at Artex Risk Solutions. He can be contacted at: firstname.lastname@example.org