A captive insurance company is set up to insure the risks of its owners and is an integral part of a good risk management program. Specifically, a captive insurance company is "an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer's underwriting profits." This includes pure captives, association captives, and industrial insured captives.
Starting a captive insurance company is not a difficult task if the following steps are followed. Within 5 steps a parent company or a group of companies can start a captive insurance company.
Step 1—Determine the Likely Captive Structure
There are many different types of captive insurers. So, the first step in setting one up is to determine which type of captive might be most suitable for your risk management needs.
Step 2—Conduct a Captive Feasibility Study
Once the captive structure has been chosen, the next step in the process is to conduct a captive feasibility study. A captive feasibility study is a study undertaken to determine whether a contemplated risk financing program is feasible for anorganization or group of organizations.
A study, or a proposal for a captive feasibility study, should always begin by stating its scope and purpose. If the purpose is simply to fulfil a requirement that a captive submit a feasibility study as part of the application filing, the study will simply focus on what a regulator will need to review: the assumptions used in producing the captive's financial projection. The study becomes a business plan, with actuarial support for the loss assumptions, a description of any reinsurance protection behind the captive, and an explanation of how the capital requirements of the selected domicile will be met.
While not all domiciles require a captive feasibility study, any organization that is serious about its risk control program and is considering a captive should conduct one. The study provides detailed information allowing the organization to make an informed decision as to whether a captive program will be beneficial.
Step 3—Interview and Retain a Captive Manager
While not all captives will operate using a captive manager, the vast majority do. A captive manager plays a key role in the formation, development, and overall success of the captive. A captive manager brings the following areas of expertise to the table: accounting, actuarial, claims management, domiciliary and regulatory, investment management, pricing and underwriting, and potentially tax. While the captive manager may not be an expert in all of these issues, it has established vendor networks in all of these areas that can assist your organization in securing the right professional partnerships.
Step 4—Select a Domicile
Equally important to the success of a captive insurance company is selecting the best domicile for the captive. There are now more than 70 captive domiciles worldwide, and, while all may not be an option for your captive, a good partnership with your regulators is extremely beneficial. Your captive manager should assist you with considering prospective captive domiciles. Key elements to look for include the following.
Step 5—Preparation and Submission of a Captive Application
Once you have determined where you want to domicile your captive, the final step in the process requires you to complete and submit an application and all additional materials to your chosen domicile. Your captive manager will assist you in the completion of the necessary materials. You will also need to provide the domicile with evidence that you have the necessary capital required for the captive in a form suitable to the regulator. Approvals typically can take 90 days or more, although domiciles are becoming better at streamlining this process.
It is relatively easy to set up a captive insurance company by following these five steps. Of course, the process is likely to go much smoother and with fewer mistakes if a competent captive professional, such as ACMS to help you navigate the process.