A Guide to Captive Insurance

A captive insurance company is created and wholly owned by a non-insurance parent company to insure its own risks. These risks may be difficult to insure through commercial insurers, or the traditional market may charge high premiums. In this scenario, forming a captive insurance entity provides a more effective and customizable risk management tool.

Captives can be used by a variety of businesses to insure risks such as property, casualty, and other forms of contingency coverage.

Labuan IBFC provides flexibility by offering different forms of captive insurance. These include:

• Pure/Single Captive: A captive insurance company established to insure the risks of its parent company.

• Group/Association Captive: Created to insure the risks of a group of companies or associations.

• Multi-owner Captive: A structure where multiple owners share the captive to underwrite risks.

• Master Rent-a-Captive (MRAC) and Subsidiary Rent-a-Captive (SRAC): These structures allow a company to “rent” a captive, rather than establish their own, providing a cost-effective solution.

• Protected Cell Company (PCC): A single legal entity that can create multiple cells, each ring-fenced from the liabilities of other cells.

These options provide businesses with the flexibility to choose the best captive structure based on their needs and risk profiles.

1. Customizable Risk Coverage: Captives allow companies to insure risks that may be hard to place in the traditional market, providing bespoke solutions tailored to specific needs.

2. Direct Access to Reinsurance Markets: Companies can directly access reinsurance markets, potentially reducing the premiums they pay to commercial insurers.

3. Stabilize Premiums: With a captive, companies can control and stabilize their insurance premiums, rather than being subject to market fluctuations.

4. Tax Efficiency: Labuan IBFC provides a tax-efficient environment for captive insurance entities, with a tax rate of 3% on net audited profits or an irrevocable election to be taxed under Malaysia’s Income Tax Act.

5. Shariah-Compliant Options: Labuan IBFC offers Shariah-compliant captives, making it a favored jurisdiction for Islamic finance and insurance solutions.

Setting up a captive in Labuan IBFC is a straightforward process that involves submitting an application to the Labuan Financial Services Authority (Labuan FSA). The key steps include:

1. Submit Application: Work with a licensed underwriting or captive manager to submit the required documents for a captive license.

2. Meet Economic Substance Requirements: Captives in Labuan must meet substance requirements, such as having an operational presence, conducting directors’ meetings in the jurisdiction, and maintaining accounting records in Labuan.

3. Approval and Operation: Once approved, the captive can begin underwriting risks and managing the insurance program of the parent company.

Labuan IBFC also offers a liberal exchange control environment and is connected to over 70 double taxation agreements through Malaysia’s treaty network.

Conclusion

Labuan IBFC is a premier destination for captive insurance, providing businesses with flexibility, tax advantages, and a range of structures to choose from. Whether you are looking to set up a pure captive, a multi-owner captive, or take advantage of the protected cell company (PCC) structure, Labuan IBFC has the infrastructure and expertise to support your needs.

If you're considering forming a captive insurance company in Labuan IBFC, contact DingerCo today for expert guidance and assistance throughout the process.