Chapter 5: Formation and Licensing Captive formation and licensing are vital components to determine the legal, financial, and operational aspects of the captive, including its ownership, governance, and regulatory compliance. The process involves creating a separate insurance entity, often owned by a business or a group of companies, to underwrite specific risks. The importance of formation and licensing lies in the regulatory and legal framework it provides. By obtaining the necessary licenses and adhering to regulatory requirements, a captive can operate as a legitimate insurance company, enjoying many financial benefits. Additionally, going through the formation and licensing process ensures compliance with industry standards and helps establish credibility and trust with insured parties. It also helps mitigate the risk of abusive or poorly designed captives, as competent professionals, such as attorneys and accountants with specialized knowledge and experience, are involved in the process.
5.1 Formation Structures 1) Basic Captive Structure
The basic captive insurance formation structure involves the captive, insured business, and shareholders. The captive insurance company is established by the insured business to cover its risks and is typically a subsidiary or affiliate of the business entity. The insured business transfers its risks to the captive by purchasing insurance policies from the captive instead of traditional commercial insurers. The captive collects premiums from the insured business and uses these funds to cover potential losses and expenses arising from the insured risks. The insured business and its shareholders benefit from this structure in several ways. First, the insured business has more control over its insurance program and can tailor coverage to its specific needs. Second, the insured business can potentially access more favorable claims
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