The Risk Purpose Trust as an alternative to Captive Insurance.

Transcription

1 The Risk Purpose Trust as an alternative to Captive Insurance

2 With Princeps comes the original Risk Purpose Trust The Risk Purpose Trust ( RPT ) is a Guernsey based mechanism offering a new solution to budgeting for and providing for unforeseen and foreseen expenses. The varied uses of an RPT can range from : Support and provision for the unforeseen risks of corporates generally Gratuity payments, incentive payments or sports bonuses Future repair costs or replacement costs (ie foreseen expenses) Rent guarantees for landlords of large property portfolios Pension shortfalls How does a Risk Purpose Trust Work? Used in this way, the Risk Purpose Trust : Corporation Trust Contribution Allows a corporation to ensure its risks are well managed and appropriately funded Promotes strong corporate governance in the area of risk management Is not a tax shelter or other aggressive tax avoidance mechanism Is a logical and less restrictive alternative to the traditional Captive Insurance vehicle Support for Risks Risk Purpose Trust The RPT provides the financial support via the Trust Deed. The Corporation is the Settlor of the RPT and it and its subsidiaries are the Beneficiaries. A Guernsey appointed Trustee is the Trustee of the RPT. The level of the financial support the RPT can provide to its Beneficiaries is limited to the amount of funds it has within it, in other words the accumulation of its settled funds and any investment income received on them. However, additional funds can be introduced at anytime. It is important to distinguish between a Risk Purpose Trust and a market or Captive Insurer when the RPT is used in this way. The RPT provides no contract of insurance or contractual right to receive payments. Rather the RPT has a purpose, defined in the Trust Deed, in this instance for example to fund the Unforeseen Expenses of the Beneficiary(ies), and the Trustees then use their discretion and judgement to make funding to the Beneficiary(ies) as appropriate. The Risk Purpose Trust is a more efficient mechanism for Risk Retention in both direct costs and management time - assisting a corporation in reducing its total cost of risk. The financial benefits of choosing to utilise an RPT in place of a more traditional Captive Insurer are considerable Although very valuable vehicles in assisting the risk management process, Captive Insurers come at a frictional cost, the level of which appears to be increasing year by year. The key frictional costs are: Capital to fund the Captive s solvency requirement and the net cost of providing that capital. Insurance Premium Tax, charged on premiums remitted to the Captive, even though this is, in effect, self-insurance. Management fees and other third party costs payable. Regulatory fees and the costs of dealing with regulatory supervision. Management time for the parent group. The RPT has been developed to minimise the frictional costs of effective risk management and self-funding of risk exposures as the following table demonstrates for a UK Company : CAPTIVE INSURANCE The Risks can be of any nature Because of the nature of the RPT and the breadth of its application and support, the risks this mechanism can be used to support: Can be unforseen OR forseen Need NOT fall into a particular period Need NOT be insurable Need NOT be transferable to a third party RISK PURPOSE TRUST Premium 2,000,000 2,000,000 Contribution UK Tax deductible Yes Yes UK Tax Deductible Capital 500,000 0 Capital Costs Costs UK IPT 120,000 0 UK IPT Management Fee 40,000 40,000 Trustee Fee Regulatory Fee 6,000 0 Regulatory Fee Audit Fees 5,000 5,000 Audit Fees (if required) NED Fees 12,000 0 NED Fees TOTAL COST 183,000 45,000 TOTAL COST The risk purpose trust by its very nature is flexible and caters for multi-year support.

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