www.pwc.

com

Captive
Insurance
Our Global Financial Services
Practice
PwC is the worlds largest professional services firm. Our Insurance Industry practice, a part of
our broader Financial Services practice, operates across industry sectors, geographies and
functional skill areas to bring you the broadest perspectives and responses. Ours is a market-
driven, market-specialized, highly credentialed practice that provides independent accounting,
business advisory, tax, actuarial, regulatory, and other services to some of the largest, most
prestigious financial services institutions in the world. Our global team of over 30,000 financial
services professionals serves virtually every segment of the financial services industry
Insurance, Banking and Capital Markets, Investment Management and Real Estate.

Table of Contents:
Captive Insurance 101
Feasibility and Structuring Services
Health Check
Captive Closure
Our Specialist Resources

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Captive Insurance 101
Background
A captive insurance company is a subsidiary established by one or more commonly-owned
businesses to insure the risks of the controlling entity and/or its affiliates or its individual owners.
A captive insurer is under the purview of the respective insurance regulatory authority and
prepares a separate audited financial statement.
There are in excess of 5,000 captives, including group and cell captives, established in various
domiciles throughout the world. Businesses have been using captives for decades as a risk
management tool. All types of industries may benefit from a captive insurance company.
While there are a number of different forms of captive insurance companies, this document will
focus on pure captives, also known as single parent, wholly-owned captive insurance
companies.

Risk Management
One of the primary goals of a captive insurance company is to provide improved risk management
for an organization. The following are some of the risk management benefits that can be achieved
through the use of a captive insurance company:

Increase financial efficiency of ones risk Create flexibility in responding to changes in

management program; ones risk retention and risk transfer strategies;

Mitigate the impact of pricing and Obtain coverage for risks traditionally not
capacity volatility in the commercial readily available or economically feasible in the
markets; commercial markets;

Obtain access to reinsurance markets; Create centralized accountability for risk

management of diverse operations, business units
Maintain control over claims analysis; or insurance programs;

Obtain access to government programs Reduce insurance administration costs and

(e.g. terrorism insurance); recapture underwriting profits.

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Structure
A captive insurance company is a separate
legal entity, established and licensed as an
insurance company in its chosen domicile.
As an insurance company, it is subject to
regulation. A captive will be subject to the
same corporate governance matters as other
subsidiaries in the consolidated group,
including establishing a sound business
plan. A captive may insure brother/sister
subsidiaries, the parent entity, or unrelated
third parties. The basic captive insurance
structure is illustrated to the right.

The captive insurance company must be

capitalized. In order for the captive to have an impact on the corporate group, it requires a
material amount of capital and premium funding. As a result, there may be an opportunity cost
associated with lower yield captive investments vs. higher parent hurdle rate (ROI).

Insurable Risks
One of the benefits of a captive insurance company is the ability to tailor the insurance coverage
to the needs of the organization. There are a number of types of coverages that are considered
traditional captive lines of business, as they are common in the industry. However, captive
insurance companies can provide more unique and exotic insurance coverages as well, as
illustrated in the examples below.

Traditional Coverages Other Coverages

General liability Employee benefits

Workers compensation Construction exposures (OCIP Owner

Controlled Insurance Programs)
Auto liability
Trade credit risk
Property
Cyber risk
Product liability
Intellectual property
Professional liability
Reputational/brand/loss of income risks

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
 Taxation
The tax status of the captive insurance company for U.S. federal income tax purposes is an
important consideration. If the captive qualifies as an insurance company for U.S. federal income
tax purposes, then premium paid to the captive is tax deductible by the insured entity, and the
captive is allowed favorable tax treatment under Subchapter L of the Internal Revenue Code.
Neither the Internal Revenue Code nor the treasury regulations thereunder define the terms
insurance or insurance contract, and there are no bright line tests for qualifying as an
insurance company for U.S. federal income tax purposes. However, the courts and the IRS have
developed a framework for determining whether a contract qualifies as insurance for federal
income tax purposes. The courts have explained that in order for an arrangement to constitute
insurance, it must meet the judicial standard of insurance as set forth in Helvering v. LeGierse,
312 U.S. 531 (1941), and applied by the courts in subsequent cases. The judicial standard is as
follows:

1. Whether the arrangement involves the existence of insurance risk;

2. Whether the arrangement exhibits both risk shifting and risk distribution; and
3. Whether the arrangement is regarded as insurance in its commonly accepted sense.
Captive structures, like most transactions, have federal, state, and international tax
considerations and opportunities, which should be analyzed.

Key opportunity profile

Who should consider a captive insurance company? The following are characteristics of
companies where a captive insurance company may be beneficial to the organization:

Financial stability Decision to pursue a Substantial operations in high tax

captive insurance jurisdictions
Good risk company is driven by
management an interest in financing Multiple global operating entities
practices assumed risk positions with insurable risk spread throughout

Long-term Reasonably predictable Existing balance sheet reserves for

commitment to the insurance risk self-insured business risk exposures
use of a captive or large deductibles (i.e., workers
insurance company Sophisticated financial compensation, general liability,
planning professional liability, etc.)

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Captive Lifecycle

Ongoing
Establishment Enhancement Closure
Maintenance

Tax-structuring Captive Health Assurace services Assistance with

Optimization Check communication
Opinions strategies
Actuarial reserve
State tax planning studies Regulatory
Risk management consulting
review Actuarial reserve
Program expansion
certification Liquidation tax
(e.g. employee
PwC Feasibility studies/ planning
benefits)
Support business planning Tax compliance Run-off strategies
services consultation
Formation and Risk management
regulatory consulting review
IRS audit Actuarial estimates
assistance in run-off
Segregated account Balance sheet Managed wind-up
Transfer pricing (solvent schemes,
planning monetization
support/analysis etc.)

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Feasibility and Structuring
Services
Making the right choices early
Successful captive operations need to be thoroughly researched and properly planned. Every
client has different needs; consequently every captive structure is different. Maximizing the
benefits to be gained from your captive means understanding and responding to the various
business needs and concerns within your organization. To do this effectively, you need a service
provider with a broad range of skills.

PwC has a proven track record of delivering high-quality captive insurance solutions
throughout the Captive Lifecycle. What differentiates us is our multi-disciplinary Team
Approach. Our clients have access to our team of risk management, actuarial, tax (US federal,
state and international), regulatory and accounting professionals.
The result - a menu of captive structuring services ranging from providing turnkey captive
solutions to providing specific supplementary expertise to your existing team in support of an
ongoing captive initiative, which is perhaps being led internally or by another service provider
(e.g., broker or captive consultant).

It's more than just running some numbers

We offer a broad range of services. Our professionals are ready to assist you with all aspects of the
captive establishment process including:

Risk management reviews;

Tax structuring and opinions;

Feasibility studies;

Formation assistance;

Regulatory consulting.

Our experienced team of captive experts will work with you to complete a comprehensive
feasibility analysis which addresses the variety of ways in which the captive will impact your
organization, (e.g. Insurance/Risk Management, Tax, Finance, Accounting, Treasury, Legal,
Operations}, as well as addressing your questions and discussing opportunities.

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
The PwC Captive Insurance Team provides full service captive planning,
including:
Helping you identify the right resources Advising on structuring the captive and the
in your organization to ensure the insurance program to best meet your federal
feasibility analysis considers all business income tax objectives;
drivers and requirements;

Assisting in identifying risks and limits Advising on the potential transactional

that potentially may be insured by the taxes which may be imposed;
captive;

Evaluating the appropriate arms Advising on capital requirements and

length/market premium to be charged by capitalization options;
the captive;

Advising on the optimal location of the Assisting in the identification of alternative

captive within your organizational investment strategies;
structure;

Providing insight into which captive Facilitating the domicile service provider
domicile aligns best with your particular selection process; and
goals;

Advising on the considerations in making Assisting our clients with establishing

a domicile selection; introductory meetings with domicile
regulators to present the plan for the
Assisting in evaluating the benefits of captive.
onshore vs. offshore domiciling;

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Captive Health Check
How Does Your Captive Insurance Company Stand Up?
While the Internal Revenue Service ("IRS") has accepted the use and role of captive insurance
arrangements as an integral part of a comprehensive risk management strategy, they continue to
challenge captive insurance arrangements which fail to comply with the principles and guidelines
established by the courts in defining "insurance" for US federal income tax purposes. In response,
PwC has developed a comprehensive Captive Health Check to assist companies in assessing
how their captive insurance arrangements stand up against these principles and guidelines and
to serve as a platform for identifying best practices and possible enhancements to improve the
captive's financial benefits.

Why a Captive Health Check?

First most corporations change over a period of 5 or 10 years. They acquire companies, dispose
of companies, start and end lines of business. Their structures and operations change over time.
These changes can provide new opportunities for enhanced risk management and tax benefits.
Second - substantial changes have occurred in the tax landscape dealing with captive insurance
companies. The Service has issued a number of Revenue Rulings setting out what it believes are
the requisite fact patterns for a valid captive insurance arrangement, and more recently the Tax
Court has examined captive insurance arrangements and further clarified the requirements for a
valid captive insurance arrangement.

The Captive Health Check provides the captive owner with an experienced overview of the
structural and functional aspects of their captive insurance company and is designed to provide
the captive owner with a range of benefits, including:

Identifying structural and operational deficiencies and /or opportunities in current captive
insurance arrangements from a US federal, state, and international tax perspective; and

Providing the captive owner with recommendations to strengthen the overall tax position of
the captive, while at the same time considering the overall risk management and business
goals of the company.
The Captive Health Check allows us to gain insight into the structure and operations of the
captive to inform the captive owner of "Best Practices" based upon our experience, including:

Expand the risk program to include additional alternative risks in the captive;

Identify potential alternative investment and cash repatriation options;

Explore alternative methods of funding employee benefits related costs through the captive;
and

Identify opportunities to reduce the company's overall tax burden.

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Captive Closure
How do you release your captive's embedded value?
Many companies seek to rationalize their captive arrangements and release capital or simply seek
to exit third party lines of business to enable their captive insurance affiliates to focus on core
group insurances.

PwC is the Global leader in assisting owners and shareholders of insurance entities to extract surplus value
and bring closure to their discontinued insurance holdings.
Whether you are seeking the controlled, accelerated, wind down of an entire insurance captive, or you
simply wish to exit discreet lines of insurance business in order to reallocate capital, we are able to assist
you in achieving your goals.

Why seek finality?

The use of a captive insurer is a well-accepted and useful risk transfer mechanism. In a climate of rising
rates and restricted coverage, captives have frequently delivered cost savings and invaluable in-house
expertise in risk management and loss prevention.
Extensive consolidation in most industry sectors has often resulted in companies maintaining duplicate
captive arrangements that require rationalizing. Many captives have also written third
party legacy insurance and reinsurance business, not always profitably, that now require servicing,
incurring administrative expenses and requiring capital support that could otherwise be
deployed elsewhere.

How can PwC add value?

Restructuring and rationalization of captive arrangements can mitigate exposures to legacy liabilities,
generate cost savings and financial value through:

Prevention of deterioration of reserves on third party business and release of redundant reserves;

Protection of reinsurance assets through accelerated collection activity;

Savings in ongoing administration and management costs;

PwC can assist clients in reorganizing their captive insurance arrangements in the following ways:

Accelerated portfolio de-scaling through commutation advice and support;

Whole captive closure through structured exit mechanisms such as Schemes of Arrangement or
Statutory Liquidation;

Performance and process improvement in operational areas such as claims handling and reinsurance;
and

Actuarial support in valuing and managing complex related or third party exposures.

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Our Specialist Resources
Our Captive Practice is geared to meeting the needs of our clients and their stakeholders. Our leading
insurance industry expertise and captive specialization allows our professionals to focus on helping you
resolve your business issues. Our multi-disciplinary approach to captives means that our team of seasoned
tax, actuarial, risk management, accounting and business recovery experts- can help you identify, plan and
address business issues, opportunities and challenges in a timely manner - minimizing any last minute
surprises and increasing the benefits you derive. We can help you make it all work. We have excellent
working relationships with the major domicile regulators and captive management companies and are
accustomed to helping you meet the demands of corporate timetables and objectives.

Contact Our National Captive Insurance Team

Tax

Anthony J. DiGilio Byron Crawford

Partner Director
Tony is the National Practice Leader of PwCs Captive Byron is a CPA with more than 30 years of insurance
practice with more than 26 years of experience tax experience. He has been involved in all aspects of
providing compliance, consulting, and accounting insurance taxation, and he serves as the principal Tax
services to the insurance industry while assisting Specialist supporting the firms audits of captive
clients with strategies to navigate legislative and insurance companies.
regulatory systems. [email protected]
[email protected] 314.206.8131
202.253.9028

Mark S. Smith Katherine Freed

Managing Director Director
Before joining PwC, Mark served for 5 years with the Katie has spent her career providing tax services to the
Treasury Department Office of Tax Policy, and for over insurance industry with a primary focus on captive
18 years with the IRS, including 9 years as the chief of insurance. She received her Juris Doctor from the
the Insurance Branch in the Office of Chief Counsel. University of Missouri School of Law, with a Taxation
Mark either drafted or reviewed much of the Certificate. Her areas of expertise include all aspects
governments administrative guidance on captive of captive insurance arrangements, and she serves as
insurance from 2001-2011. a Tax Specialist supporting the firms audits of captive
[email protected] insurance companies.
202.312.7518 [email protected]
314.206.8175

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Tax Bermuda Tax State and Local Tax (SALT)

Richard E. Irvine Michael Palm

Partner Director
Rick leads PwCs Offshore Tax Practice in Bermuda Michael specializes in state and local taxation matters
and the Cayman Islands. With over 32 years of in the insurance industry. He has over 20 years of tax
experience, Rick is responsible for providing tax experience, including Tax Director at the Nationwide
consulting and compliance services to offshore Insurance group of companies prior to joining PwC.
financial services companies, including captive [email protected]
insurance, offshore reinsurance, and offshore 312.298.2483
investment funds.
[email protected]
1.441.299.7136 Advisory Insurance Risk Management
Services

Scott Slater John Merrigan

Director Managing Director
Scott provides tax consulting and compliance services With over 35 years of risk management and insurance
to insurance companies, offshore investment funds, experience, John is the national practice leader of
and multi-national clients. He assists clients with the PwCs Insurance Risk Management Solutions practice.
structuring of and providing tax consulting and He has worked as part of PwCs national captive
compliance services to captive insurance companies, insurance team for over 15 years, focusing on the
offshore reinsurance companies, and hedge and identification of risks suitable for the captive and
private equity investment funds. working with clients on the premium for risk and the
[email protected] associated capital requirements.
1.441.299.7178 [email protected]
646.471.5847

Tax International Services (ITS)

Nieves Serrano
Surjya Mitra
Managing Director Director
Nieves has just rejoined the practice after four years
Surjya is a CPA and an attorney, with an LLM in Tax,
working in Europe for a major brokerage firm, in a
and a member of PwCs International Tax Services
Practice in the National Tax Office in Washington, consulting role, assisting corporations to holistically
implement global insurance risk management
D.C. He provides tax advice to a number of inbound
programs, as well as specializing in the captive
and outbound insurance clients and has worked with
many domestic and foreign insurance companies, consulting arena.
[email protected]
brokers, investment banks, and their clients.
646.471.1048
[email protected]
202.414.4382

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
Actuarial and Insurance Management
Solutions

Christopher Walker
Principal
Chris has more than 25 years of experience as a
Casualty Actuary, and he leads the Midwest Property
and Casualty Actuarial Consulting practice. His
technical capabilities include loss reserve, ratemaking,
and regulatory assistance to various insurance carriers
and self-insurers.
[email protected]
312.298.3223

Lisa Slotznick
Managing Director
Lisa has more than 35 years of property and casualty
reserving experience, and she leads PwCs actuarial
asbestos and environmental valuation team. She is the
primary consultant for workers compensation,
general liability, and professional liability services for
large commercial self-insurers, insurers, and
reinsurers. Lisa is also PwCs lead resource on
statements of actuarial opinion and actuarial
professional standards.
[email protected]
678.419.7126

Why is PwC the Right Choice?

PwCs extensive experience and in-depth knowledge of the insurance industry has allowed us to
maintain the largest presence of the Big Four firms in the global insurance market. In addition, we
currently audit more than 40 percent of the Global Top 50 insurance companies and serve more than
4,000 insurance companies and groups around the world. We provide tax, risk management, actuarial
and assurance services globally to more than 500 captives from our various offices around the world.
We believe that our multi-disciplined team approach distinguishes PwC in the captive insurance and
alternative risk transfer arena. Our Captive Insurance Team comprises experienced tax and insurance
professionals with expertise in accounting, risk management, actuarial, and US federal and state
taxation. We are uniquely qualified to address the issues facing your captive. We regularly assist our
clients in all levels of both federal and state tax controversy issues concerning their captive insurance
companies.

2016 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.