Performing a Captive Insurance Company Feasibility Study
This will normally include as follows:
1. Full details of the company's or group’s current insurance program with details of limits purchased, deductibles, premiums and loss experience for the last five years.
2. Information showing the exposures to the current and future insurance program, including the values of all locations, numbers of staff taking into account any future acquisitions or expansions.
3. Details of any risk management or loss prevention techniques in place.
4. Up to date financial information which should include balance sheets, budgets, and financial statements.
A general rule is that a minimum premium of $5,000,000 is needed to make a captive viable however this can be reduced to around $500,000 if a rent-a-captive is being used.
In order to establish the suitability of insuring a line of business into a captive, a comparative analysis is normally required to distinguish between the existing insurance structure and the proposed captive insurance approach. A key issue is whether the company will benefit in the long-term, as well as in the short term, from any captive insurance arrangement.
Key issues to consider are as follows:
(i) Loss Experience against Future Costs
The comparative analysis should demonstrate what the average amount of losses versus the premium for at least the last five years has been when set against the projected losses after reinsurance recoveries versus the total captive costs going forward.
As an example, the costs of a captive might be as follows: ·
Fronting Company Fee: 5.00%
Captive Management Fee: 10.00%
State Premium Taxes: 3.75%
Boards and Bureau Fees: 1.75%
Safety Engineering Fees: 1.75%
Claims handling: 5.00%
Other possible costs could include the use of an underwriting agency fee if required, as well as accountancy and legal fees.
(ii) Issuing Carrier
If a fronting company is to be used, the captive user should seek to secure a long-term relationship and ensure that the company is financially strong enough to give reassurance that they will be able to be a long-term partner.
Whilst fixed costs will be subject to little fluctuation, an important issue to consider is the price of reinsurance, as prices can vary according to market conditions as well as loss experience.
(iv) Establishing Links with Service Providers
Working with the right service providers is often key to a captive program's success. It is important to ensure that the professional services required are available, and also to ensure that the right ones are selected. Service Providers can include Captive Managers, Underwriting Managers, Fronting Carriers, Legal Counsel, Auditors, Accountants, Reinsurance Intermediaries and Loss Control specialists.
Over the past twenty years, the captive industry has grown in sophistication and all services are widely available. But as with any hiring of outsourced services, care needs to be taken that ones chosen are professionally capable and proficient.
Also in this section
A Brief History of Captive Insurance
Reasons to Set Up a Captive Insurance Company
Different Types of Captive Insurance Company
Selecting a Captive Insurance Domicile and Captive Manager
Reinsuring Captive Insurance Companies