If you’ve decided that a captive is a good fit for your organization, take the following steps to more carefully study the appropriateness of a captive insurer:
- Review relevant background information
- Discuss financial implications of captive formation
- Generate projections of expected loss experience
- Estimate operational expenses associated with the captive to determine premium
- Determine appropriate capital levels or margin of risk to support the written exposure, considering local legislation
- Describe qualitative factors including location, ownership, support or other issues
- Prepare financial statements with balance sheets and income statements for the captive over a five-year period under different scenarios
- Compare the captive with the status quo on both financial and nonfinancial criteria
Consider the following issues when examining captive insurers:
- Align your investment policy to the assumptions used to set premiums. Consider whether to use the time value of money based on the captive’s assets—for example, letters of credit do not generate investment income, so premiums should not be set considering the time value of money.
- Consider state or domicile premium taxes, U.S. federal excise taxes, U.S. income tax and 953(d) election (for foreign insurance companies).
Having determined that a captive is right for your organization, seek professionals experienced in actuarial, accounting, tax and legal issues to help you set it up. They can assist you with the following additional steps:
- Selecting the Domicile: Select an onshore (within 50 states) or offshore (outside the United States) domicile. Here you must consider ease of regulation in the area and the quality and quantity of support services. A visit to the domicile may assist.
- Selecting Partners: Selecting the right risk-sharing partner is critical to the success of the captive. This is the entity responsible for claims, generally a U.S. licensed and admitted insurance company. The partner could be your current, traditional insurer or you could have time to form a new relationship—the partner will likely have strong opinions on your plan, and may have restrictions or requirements on practices and procedures.
- Operating a Captive: The captive will be an operating insurance company. It must receive funds immediately and invest them prudently so they are available to pay claims. This can be a source of revenue for the captive, but can also cost the owner substantial sums if improperly managed. Assigning roles and responsibilities and conducting frequent analyses on the captive’s financial health is essential to ensuring it is bringing the desired benefits to the organization.
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