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How to Set Up a Captive Insurance Company

Long used by some of the largest corporations in the world, captive insurance is a powerful risk management approach that can offer superior insurance coverage and lower expenses. Smaller business owners are increasingly adopting this self-insurance model, especially in the United States. Setting up a captive insurance company can be challenging, requiring due diligence on the part of the business owners seeking this alternative to traditional insurance carriers. With the following 5-step process, your clients will gain a clear understanding of what is involved with establishing a captive, helping them to make smart decisions about their risk management strategies.

Captives 101

The term “captive insurance” may be unfamiliar to small business owners. In simple terms, a captive is an insurance entity wholly owned and controlled by the company or companies it insures. Captives are often established when businesses cannot find or afford adequate coverages in the traditional insurance market. As a form of self insurance, captives have the potential to provide business owners with a range of benefits, including:

  • Underwriting profits in years with low claims volume/claims severity.
  • Tax advantages.
  • More flexible insurance coverages.
  • Better control over claims processing.
  • Stability in insurance pricing.
  • Availability of specialized coverages when traditional insurers cannot or will not cover unique risks.

Once reserved only for the most financially sound corporations, captive insurance has gained acceptance in by small to midsize businesses in the U.S. and beyond. Today, over 7000 captive insurance entities are domiciled worldwide, with more being added nearly every day.

Step One: Choose the Captive Model

The first step in establishing a captive insurance entity is choosing which captive model suits the needs of the business. There are several models to choose from, each with its own attributes:

  • Single Parent Captives – typically used by large companies, this model is solely responsible for insuring the risks of its owner. Single parent entities are sometimes referred to as “pure” captives.
  • Group Captives – formed by a group of companies or organizations that jointly own the insurance entity, this model is ideal for smaller businesses that may not be able to afford the capital outlay of establishing a captive on their own. Typically, group captives bring together similar businesses within one industry sector. However, entirely different industry groups can pool their risks in a group captive if desired.
  • Protected Cell Captives – smaller businesses can enjoy the benefits of captive insurance without the expenses associated with captive formation. In this model, insureds purchase or rent “cells” in the captive. Risks are shielded from each other, helping to protect the assets of the individual members.
  • Risk Retention Groups – operated as liability companies owned by their members, RRGs are often used by businesses with similar insurance needs to pool their risks. This is a specialized category of captive insurance and must adhere to state and federal laws. All insureds of an RRG must be owners of the captive, and all owners in the RRG must be insured by the captive.

Step Two: Determine Feasibility

Once the captive structure has been pinned down, clients interested in this insurance solution must next undertake a feasibility study. This study provides information that will influence insurance decisions going forward. A feasibility study is much like a business plan, assisting stakeholders in discovering what hurdles or challenges to expect in captive formation. Factors to consider are the scope and purpose of the study, the financial ability of the company in establishing a captive, and the specific needs of insurance coverages or services that can be managed by a captive. In essence, the feasibility study helps a company decide if a captive is right for its needs.

Step Three: Select a Captive Manager

Managing any insurance solution can be challenging. For businesses that choose captives to insure their risks, a capable manager is essential due to the fact that traditional insurers are no longer part of the picture. Captive managers must be adept in:

  • Claims management
  • Regulatory and domiciliary requirements
  • Investment management
  • Insurance pricing and underwriting
  • Actuarial services
  • Tax codes and filings

Third-party captive managers are available to help business owners navigate the complex waters of captive insurance. These firms often have the experience and the reputation needed to make captives the right choice for self-insuring business risks.

Step Four: Selecting a Domicile

Agencies tasked with regulating captive insurance require that these entities establish domicile in one of over 70 captive domiciles worldwide. Because state and federal laws vary, not all domiciles may be available to your clients. To help them select the right domicile for their needs, consider:

  • Access
  • Support services
  • Stability of politics/government
  • Expenses associated with domiciling

When selecting a domicile, a capable captive manager can be beneficial. These managers often have established partnerships with captive domiciles and the regulatory agencies overseeing them.

Step Five: Prepare and Submit the Captive Application

The final step in the process of establishing a captive after selecting a domicile is to complete the application process. This process often requires the submission of supporting documents, including feasibility studies, financial disclosures, and tax information. The domiciling authorities review these materials and make a final approval/denial decision. During the application preparation process, captive managers can help answer questions and to streamline the setup process. Captive insurance is a powerful risk management solution, putting control and claims management in the hands of business owners who may not find equivalent insurance coverages on the commercial market.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.