By James Watlington | Founder and Chairman, Alexanders Bermuda

At our recent PCD presentation in London, we touched briefly on trusts and captive insurance as part of Bermuda’s structuring toolkit for private wealth.

For sophisticated family offices, preserving wealth is not only about investments. It is also about managing risk, protecting the family balance sheet, and ensuring the structure can respond when the unexpected happens.

That is where captive insurance can play a role.

What is a captive?

Put simply, a captive is an insurance company established to insure the risks of its owner or a related group.

Captives have long been used by businesses to retain predictable risks, fund deductibles, fill gaps in commercial insurance and access the reinsurance market. The same logic can apply to a family office with residences, art, aircraft, yachts, operating businesses, cyber risk and directors’ and officers’ exposures.

These risks may sit under separate policies with different insurers, limits and exclusions. A captive can bring selected risks into one coordinated programme, provide bespoke cover, retain manageable layers of risk and transfer larger exposures to commercial insurers or reinsurers.

There can also be a longer-term benefit. Instead of all premiums leaving the family structure, the captive builds reserves for future claims. If it performs well, any underwriting surplus and investment income remain within the wider family structure. Subject to solvency and regulatory requirements, the captive may also pay dividends to the Family Holding Company.

A captive will not make sense in every case. Where commercial cover is readily available at an attractive price, buying in the market may be simpler and cheaper. The opportunity is more likely to arise with unusual risks, exclusions, high deductibles, fragmented cover or gaps in the commercial market.

That is why a trusted insurance broker should be involved from the outset, alongside your legal adviser.

Where does the captive sit?

This is the practical question: who owns the captive, which entities are insured, who pays the premiums and where does the value created in the captive sit?

A simple structure might involve one trust, one Family Holding Company and several underlying SPVs or operating companies. The trustee holds the shares in the Family Holding Company in its capacity as trustee. The Family Holding Company owns the captive alongside the SPVs holding the family’s assets or business interests. The captive is therefore a sister company of the insured entities.

The SPVs pay premiums to the captive and receive claim payments following an insured loss. Because the Family Holding Company owns the captive, the economic value built up within it remains within the wider family structure.

It is worth being precise: the trust itself is generally not a legal person. The legal shareholder is the trustee acting in that capacity, whether it is a professional licensed trust company or a private trust company.

The captive must also remain a genuine insurance company, with its own board, capital, accounts, underwriting decisions, policies, reserves and claims process. It should not simply be treated as another family investment vehicle.

Why does Class 1 work?

A Bermuda Class 1 captive can work particularly well with this structure.

Broadly, a Class 1 captive insures only the risks of its owner or related group companies. Where the Family Holding Company owns both the captive and the underlying SPVs, the ownership relationships are clear.

A Class 1 captive is registered and supervised by the Bermuda Monetary Authority (BMA). It requires minimum paid-up share capital of US$120,000, although its actual capital requirement will depend on premiums, reserves and risk profile. It must also meet statutory solvency requirements, appoint an approved auditor and principal representative in Bermuda, and file annual statutory financial statements and regulatory returns.

These requirements bring discipline and credibility without the regulatory burden of a commercial insurer writing substantial third-party business.

What about more complex structures?

Not every family structure will fit as neatly. There may be several trusts with separate holding companies, even where they share the same trustee, or the trustee may hold several assets or SPVs directly.

These arrangements do not prevent the use of a captive, but the Class 1 option becomes less straightforward. Sharing the same trustee does not, by itself, make companies held under separate trusts part of one corporate group. Ownership of the captive and each proposed policyholder therefore needs to be mapped carefully.

The existing trust structure is unlikely to be changed simply to accommodate a captive. The captive should be fitted to the family structure, not the other way around.

Bermuda also offers segregated structures. A Segregated Accounts Company (SAC) can maintain separate accounts for different risks, assets, family branches or trusts. An Incorporated Segregated Accounts Company (ISAC) goes further, as each incorporated segregated account is a separate company, providing greater legal separation.

Where Class 1 is not a clear fit, Class 2 registration may offer an alternative. Broadly, Class 2 can apply to a captive owned by two or more unrelated persons where at least 80% of its net premiums relate to their risks or those of their affiliates. It can also apply to a single-owner captive writing up to 20% unrelated business.

Class 2 is not an automatic solution. Ownership, the relationship between insured entities and the source of premiums still matter, and more complex structures may warrant early engagement with the BMA.

Captive insurance will not suit every family office. But for the right family, with the right risks and structure, it can provide a practical way to address coverage gaps and strengthen the family balance sheet over time.

At Alexanders Bermuda, we would be pleased to answer your questions and discuss whether a captive may be suitable for your family structure.

This article does not address specific trust law or trustee implications. As family assets are often held across multiple jurisdictions, specific insurance, tax and legal advice should be obtained in each relevant jurisdiction.

This article provides a high-level overview and does not constitute legal, tax or insurance advice.