All About Captive Insurance

A captive insurance company is a completely owned subsidiary company which offers risk-mitigation services for its parent company or a group of related companies. It can also be set-up if the parent company cannot seek an outside firm to insure them against specific business risks, or if the insurance offered is more affordable or offers enhanced coverage for the parent company’s threats.

Understanding the Captive Insurance Company

A Captive Insurance Company is a kind of corporate ‘self-insurance’. While there are financial benefits of producing a separate entity to offer insurance services, parent companies must take into account the associated administrative and overhead costs, like additional personnel. There are also complex compliance issues to contemplate. Consequently, bigger corporations predominantly form captive insurance companies.

Objective of a Captive

‘Captive’ in an insurance company which is owned by the insured, is legit but not useful for decision making in a time of challenge. To start with, captives are all about money. You want one to make money, it will definitely cost money to have one.

Captives is another alternative by which risk to loss is financed. They are not inherently mysterious, or illegal for all situations. The fact that the insured, or an entity closely related to the insured, can or cannot intervene on the captive transaction.


The foundational captive structures comprise of :-

  • Single Parent
  • Group/Association
  • Rental Captives
  • Segregated Protected Cell
  • Non-Controlled Foreign Corporations

Operating a Captive

The captive will likely be a reinsurer to the risk-sharing partner, accepting a fixed level of risk and the accompanying premiums. The captive is now a Reinsurance Company. It will also be likely to buy reinsurance. It is up to the owners to set up appropriate committees; like underwriting, claims, investment and audit.

In the beginning stages, the most significant of these is the Investment Committee. Funds will be received almost instantly and must be judiciously invested so that they are accessible to pay claims. This is a main source of revenues for the captive, which previously went to the traditional, primary insurer. Earnings from these investments can, over time, be considerable and become the primary reason for the existence of the captive. Inadeptly handled, although, they can cost the owner substantial sums and even endanger the continuation of the captive.

If the captive is to manage risks other than that of the owners, then an Underwriting Committee must be established along with underwriting standards, lines of authority, and procedures. This committee can also be responsible for arranging reinsurance. This is an opportunity to enhance costs from pre-captive structures.

At some early stage, a Claims Committee must be in place. It will routinely analyse claims reports to determine trends, underwriting violations, and reserving practices. It may be involved in variety of adjusters, attorneys where appropriate, and reserve management. This is another area in which costs can be enhanced from the traditional placement.

Labuan Captive Insurance License

Labuan captive business is established as an insurance business where the insured is a related corporation or an associated corporation of the Labuan insurer or where the insured is any other person in respect of whom the Labuan insurer is authorised by Labuan FSA to offer insurance or reinsurance.

A Labuan captive insurance is also permissible to underwrite for a third party, subject to the approval of Labuan FSA. The underwriting profit made by the Labuan Captive Insurance company can be redistributed back in a form of dividends which is zero tax.

Captives are generally being domiciled in an offshore jurisdiction rather than in an onshore environment due to its very restrictive and non-conducive conditions in operating an insurance company.

The Labuan captive is also very flexible which can be structured to accommodate any particular requirements for their coverage and will no longer be subjected to the unpredictability of the external insurer or conventional insurance.

Labuan is a substance-enabling jurisdiction at an affordable cost. It is significant for a business to be able to exhibit its commercial substance in the jurisdiction the captive is domiciled.

Following are some instances of commercial substance which can easily satisfy the global implementation of the Action Plan on Base Erosion and Profit Shifting (BEPS) by the Organisation for Economic Co-operation and Development (OECD) :-

  • Annual General Shareholders’ and Board of Directors’ meetings held in the captive’s domicile
  • Directors’ duties are performed in the domicile
  • Accounting books and records are prepared and maintained in the domicile
  • An operational bank account in the domicile
  • There is participation in the management of the captive by a resident of the domicile
  • Key management decisions are made at the domicile

Reasons for Forming a Labuan Captive Insurance Company

  • Lower insurance costs
  • Access to the re-insurance market
  • Full control over risk management and the group’s insurance program
  • Able to customise coverage to meet specific needs and ‘uninsured’ risks
  • Tax minimisation and deferral
  • Permissible to underwrite third party insurance

To understand in depth about Captive Insurance as well as how to leverage and pay the right amount of tax from such structure, get in touch with our QX  team of consultants at +60 3 9212 6940 or for a complimentary consultation.