Want to invest in a captive insurer? Check what you're getting into first, says Adrian Carter
Insurance premiums are rocketing and some businesses are having trouble obtaining cover at all, so it's no surprise registered social landlords are considering alternatives such as captive insurance companies. Broadly speaking, a captive insurance company is a closely-held insurance company – usually offshore – whose business comes from and controlled by its owners or members.
Before you commit to a deal with a captive insurer, however, consider the following:
RSLs, and particularly charitable RSLs, may not have the power to buy shares in a captive insurer – almost always an offshore company. Such shares are unlikely to fall within any of the RSL's categories of permitted investment. The RSL must satisfy itself that the purchase of the shares is just a part of the overall deal – the purchase of insurance – rather than an exercise in its investment powers.
Many captive insurance schemes may need participating RSLs to contribute further premiums to cover losses as they arise. So a charitable RSL could find itself having to pay unlimited extra premiums to compensate the insurer for losses arising elsewhere. Is this buying insurance or is it a guarantee against the losses of the insurance company? If it is the latter, charitable RSLs will find it very difficult to claim that they have the power to buy such a policy, particularly if the other RSL in the captive group has non-charitable objects. If legal analysis of the transaction finds that it amounts to the giving of the guarantee, charitable RSLs should not participate. Even non-charitable RSLs would need to give "best interest" considerations careful thought.
A charitable RSL could find itself having to pay extra to compensate the insurer for losses elsewhere
Participants must satisfy themselves that the terms and conditions, including any extra premiums, do not amount to guarantees.
If the scheme involves the purchase of a share in the captive insurance company, will the Housing Corporation view that as a proper use of the RSL's funds? Again, the answer must depend on the analysis of the transaction. Is this an investment or merely a term and condition of the insurance? Any RSL proposing to participate in such a structure would be well advised to ensure that it has the full support of the Housing Corporation.Most, if not all, RSL loan agreements will include provisions governing the insurance of the properties to be charged as security for the loan, and, often, the insurance of the RSL's assets as a whole. Typically, these provisions will require the insurance to be taken out with a reputable insurance company, or perhaps an insurance company reasonably acceptable to the lender. Will a captive insurance company satisfy the relevant tests? It would be prudent to ensure that all lenders are happy with the arrangements before entering into them.
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