Previously, we began looking at the potential benefits for businesses of forming a captive insurance company. As we noted last time, the timing of a captive insurance company’s formation is important to consider when forming a captive insurance company.
Before insurance coverage can begin, all the proper documentation must be drawn up and submitted to the state, the corporate entity must actually be formed and capitalized, and the captive must be licensed. The earlier in the fiscal year a business forms a captive insurance company, the more the business can to benefit in that particular year.
One reason for the importance of timing in forming a captive insurance company is that it can impact jurisdiction selection. Selecting an appropriate jurisdiction for a captive insurance company is important, as the regulatory environment can vary significantly by jurisdiction. Some jurisdictions are more favorable than others, and some popular jurisdictions for incorporation are offshore. Part of the reason for the importance of timing a captive’s formation and licensing is that this can affect the captive’s ability to incorporate offshore. In essence, forming a captive earlier in the year helps to better ensure the availability of offshore incorporation.
Other reasons to form captives early in the year are that the earlier a captive is formed, the more premiums the captive will earn to cover early losses, and that forming a captive earlier on allows for proper structuring and funding of the company.
Any business that is considering forming a captive insurance company should work with experienced legal counsel to navigate the legal aspects of the process, part of which is properly timing the formation and licensing of the captive.
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