Why Would a Charity Use a Captive Insurer?

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Recently a major international charity announced their captive will expand from writing UK-only business to play a key role in their international property programme.

But with no tax drivers, and no shareholders demanding increased profits, or demonstrations of risk governance, why would a charity have a captive?

It might seem a tricky question, but try turning it on its head, why would a charity buy insurance? Charities would rather be spending money achieving their core aims, and making the world a better place, than buying risk transfer they don’t really need.

Our usual methods of identifying risk tolerance need to be adapted here, as it’s the ability to continue to deliver services, and run critically important projects that drives their level of risk appetite, not a need to protect their share price or satisfy a rating agency.

For some global charities, the very nature of their operation makes them difficult to insure, pushing them to take more risk themselves, and rely less on commercial insurers.

So why a captive over a contingency fund? A captive provides a formalized, regulated vehicle for risk retention, and can bring greater discipline to risk management and governance than, say, a balance sheet fund.

As regulated entities themselves, charities understand the benefit of a transparent and rigorous approach to managing their risks, and their trustees and donors demand it.

Key Issues When Setting up a Charity Captive

Firstly, all captives require some capital investment at formation. A case must be made to demonstrate that the captive is an appropriate investment for the charity, and is compliant with the Charity Commission (or local) regulations.

This is no barrier to the formation of charity captives but it is critical that the captive has a convincing business plan and projected returns, as well as plans in place for a major loss.

Secondly, charity captives tend to be “wholly-owned” rather than facilities provided by a third party (for example, protected cell companies).

This means that the full control of the captive sits with its board of directors and ensures perfect alignment of the captive’s activities to the organization. This might include, for example, ethical investment policies.

Finally, charities don’t pay corporation tax (in most circumstances), and subsidiaries can claim relief on any profits donated to their parent.

Although fiscal efficiency is rarely the primary driver for establishing a captive, it does impact on selection of domicile.

Charities are less restricted in their selection of domicile, and able to select the most appropriate location for their needs, whether that’s a direct writing vehicle in the EU, or a low cost offshore domicile.

As you might expect, it’s not just charities that have found ways to use a captive to support their activities, government and NGO’s share many of the same characteristics, and are waking up to the benefits of building segregated internal risk capacity.

So, captives can be a valuable tool for the third sector, and we expect their use will continue to grow. I know I would rather that my charity donations were used to support its work on the ground, and invested to protect it for the future, than went into the pockets of commercial insurers. Wouldn’t you?

 


Katherine Outhwaite Guest blogger Katherine Outhwaite is a Captive Consultant within Willis Global Captive Practice – International. She is based in London and is responsible for managing and delivering a varied range of consulting projects for both new and existing captives.

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