Captives, which are alternative insurance companies owned by those they insure, often provide supplemental insurance for risks that are difficult or costly to insure. Like up to 90% of Fortune 500 companies, you may choose to start a captive insurance company to mitigate your risk.
Captives are heavily regulated insurance companies. To start a captive, you must have a risk that you want to shift or share. The captive distributes this risk through the purchase and provision of insurance.
Your company will choose between many different types of captives. For example, if your company and its affiliates are the only entities insured by the captive, you may set up a single-parent, pure captive. However, groups of entities can join together and open captives to share similar or diverse risks. Your company may even rent a captive if it doesn’t want to incur the initial outlay costs of starting a captive itself.
A feasibility study will identify the scope and purpose of the captive. This study provides the regulator with why the captive is formed and its financial projections, similar to a business plan. Capital requirements and loss assumptions are also included.
Domicile and Management
Select a domicile location that is not heavily regulated and provides support and access. Your location should be politically stable, and the captive costs should be low.
Prior to filling out your application, you should choose an appropriate manager. Your manager should understand your industry, business and location requirements. Any firm you choose to manage your captive should be able to dedicate the time and expertise it needs to provide timely, accurate claims, actuarial and underwriting services.
Managers should be knowledgeable about your domicile selection and have a strong reputation in the industry. Finally, learn about the manager’s fees. You may consider hiring managers temporarily or for a specific case or study to test their abilities.
Creating and monitoring a captive can be challenging and time consuming. Prepare yourself by gaining knowledge about the industry and process and conduct extensive research on your needs, the captive’s feasibility and the management.