Captive Insurance Best Practices

Best Practices: Getting the Greatest Value From Your Captive Insurance Feasibility Study

If you're new to the captive concept, we encourage you to review the tutorial found on this website in addition to these best practices.

This page will give you over 50 Best Practices to help prospective captive owners in obtaining the greatest value and satisfaction from their captive insurance feasibility study.

A Note of Introduction by Brenda Olson, org's President

Over twenty years ago, I began my captive career by helping a telecommunications client evaluate whether to form a captive and later to help them license it in Vermont (which was then the only US state domicile with special captive legislation. Since then, I've been through hundreds of discussions with business owners and CFOs on the topic of captives and whether the captive alternative made sense for their organization.   Since then, owning a captive has become the "norm" for the Fortune 100 and large multi-national organizations. And captive ownership is becoming more popular with mid-sized businesses today.

I found that those large organizations which formed a captive during the last hard market did not later choose to abandon it for the soft commercial insurance market during the 90's (although many captives were absorbed due to mergers and acquisitions). In fact, these captives are still "alive and well," continuing to benefit their owners in yet another hard market. I credit much of this success to the captive owners who, back then, identified their captive's strategic benefits and risks, and continue to do so today.

These Best Practices are written for the organization who is interested in owning a captive, although service providers can benefit from these as well.. These practices will help you better manage that process, help you get the most out of the learning curve you'll inevitably go through during the study. They will also help you focus everyone's efforts on viable alternatives, particularly if you're only a few months away from your insurance renewals. And they'll help you save money throughout the study process.

There are a few parting thoughts I'd like to share with you before you read the best practices, as I think they'll give you a clearer perspective.   I hope this information helps make your captive feasibility study a success.

Who Needs Best Practices? Today, the middle market is now able to "afford" a captive, given that their insurance premiums are going through the roof and the policy restrictions are tight. They're typically interested in either "building your own" captive if control is important to them or in joining a group captive which may be sponsored by a insurance broker or an association. Associations are also keenly interested in forming captives to help their members better control insurance costs and to obtain tailored loss prevention and claims management services. And existing captive owners are looking at new ways to utilize their captive to address changing business needs. Then there are the many consultants and brokers who are involved in captive feasibility studies for their clients. Whichever category you are in, you can benefit from the best practices we offer here.

Domicile IS Important. Selecting a domicile for your captive is a strategic business decision and you need to compare domiciles carefully for your organization's current and future needs. Those who have offshore captives will have to form a second captive within the US if they want the flexibility and advantages of writing employee benefits in their captive. While offshore used to be "the place to be" when forming a captive, now off-shore special purpose vehicles bring somewhat of a stigma in this post-Enron, Support America environment. On the other hand, the tax treatment of US-domiciled captives or 953(d) captives can be onerous for multi-national companies. Some domiciles don't have the resources to keep up with all of the captive applications they are receiving and have a backlog you must contend with. You'll also want to be comfortable with the domicile's regulators and service providers before making your final decision.

The Process: Embarking on a captive feasibility study costs money and takes time. For single parent captive programs, you can expect to pay feasibility study fees of US$10,000 on up, depending on the complexity and size of the proposed insurance program, while association and group captive studies can cost much, much more. In addition to paying study fees, the client should also anticipate spending considerable time in articulating its goals and needs, compiling and providing information, talking with regulators and service providers, and evaluating alternative business plans. And start the process early so you don't rush through the process and make costly mistakes.

Limitations: Our intent is to provide a general overview for prospective captive owners of the key elements for successful captive feasibility studies . ORG Corporation does not make any express or implied warranties that this information is complete or relevant to all captive feasibility studies. If you have other best practices or "lessons learned" that you'd like to share, feel free to contact us.

Best Practices for Captive Feasibility Studies

Before you embark on a Captive Feasibility Study

Know and articulate your organization's needs. Discuss these with your chief financial officer, business owners, and operational managers to ensure your complete understanding.
Surf the 'net. You'll learn a lot and it will help you avoid paying for boilerplate later.
Understand your business's organizational, financial, and risk management goals and document these.
Articulate the key issues that you'd like the study to address before you contact consultants.
Identify organizational constraints (e.g. amount and sources of capital, contractual requirements, statutory insurance requirements, etc.) and articulate these up-front.
Establish the study's key deliverables. Do you want a high level conceptual study or do you also expect a detailed business plan for the most viable option? Is actuarial and legal work included, or are these extra costs? Will travel be required as part of the study, and if so, who will pay for it?
Contract with a captive consultant who will provide you unbiased, timely advice. If they don't ask you a lot of questions, you may need another consultant.
Establish time lines and study milestones with your captive consultant.
Get it all in writing!

Learn the Relevant Laws and Regulations

Federal laws, such as the Liability Risk Retention Act of 1986.
Federal tax laws and court cases.
Statutory insurance requirements in all states and countries in which you have operations.
Captive insurance company laws - which vary by captive domicile.
Other laws affecting your industry and your organization's risk profile.

Understand and Manage the Risks

Identify drivers of claim frequency and severity and how they impact costs.
Historical loss data availability and credibility.
Will you have a reliance on the commercial market for fronting or reinsurance?
Capital requirements and the amounts at-risk aka never risk more than you are willing to lose.
Law changes or ambiguities.
Pros and cons of bundled vs unbundled services.
Commercial market responses on remaining non-captive programs.
Worst-case scenarios and contingency plans.
Identify exit strategies (but expect to be in it for the long-haul).
Prepare to document and "sell" your risk management program to fronting carriers, reinsurers, and captive regulators.

Identify and Adapt to Operational Requirements

Take care in selecting and forming the captive's Board of Directors.
Closely evaluate service provider contract requirements (e.g. captive manager, third party administrator, actuary, audit, broker/agent).
Prepare a prospectus and marketing campaign (for group captive programs).
The captive's policy forms should closely mesh with insurance needs and external requirements (eg. reinsurance and/or fronting).
Claim procedures and TPA agreements must support the captive program.
Make sure everyone knows "who is responsible for what and when."

Be Committed to the Vision and Business Plan

Write it down and promote it.
Maintain owner / senior management buy-in and participation.
Not all risks are necessarily good risks to insure in a captive.

Save Money by Planning Ahead

Begin the feasibility study 6 months or more before policy expirations. You'll pay more for services when deadlines are short.
Design the feasibility study to provide the necessary captive application documents.
Clearly articulate your needs up-front to all participants.
Don't pay for boilerplate information. Do much of your own research up-front then confirm with subject experts.
Ask the actuary to define needed information and formats. Provide information in this format to minimize associated fees.
Define and assign responsibilities. Hold all participants to their commitments.
Write your own RFPs for captive service providers and manage the selection process.
Select providers based on their expertise and responsiveness, not cost alone.

Selecting a Captive Domicile

Begin by understanding the business and tax implications with alternative off-shore vs. on-shore domiciles.
Call domicile regulators to get a feel for their philosophy and responsiveness.
Early on, identify the current domicile-specific timeframes for the approval process.
Consider whether the domicile's image and focus fits your business philosophy and needs.
Research time and costs to travel to potential domiciles.
Consider the consistency between your business hours and those of the domicile.
Check with captive owners and prospective board members to see where they would prefer to have the captive. Do they have a keen interest in one or more captive domiciles?
Meet personally with captive regulators in the "finalist" domiciles before deciding.
Meet personally with captive managers before deciding on a domicile.

Selecting Your Captive Manager

Look for rapport, expertise, commitment, responsiveness, project management skills, and the ability to coordinate multiple activities.
Avoid potential conflicts of interest whenever possible.
Communicate and document your needs and expectations.
Determine whether a bundled or unbundled service approach is best for your needs.
Enter into a well documented service contract.
Expect your captive manager to keep you continually advised and vice versa.
Look for a captive manager with expertise and experience in your industry.