Performing a Feasibility Study
The first step is to compile data for review as follows:
1.1. Information Required to Determine the Feasibility of Implementing a Captive
- Full details of a company's current insurance program with details of limits purchased, deductibles, premiums and loss experience for the last five years.
- Information showing the exposures to the current and future insurance program including values of all locations, numbers of staff, volume of sales etc taking into account any future acquisitions or expansions.
- Up to date financial information to include balance sheets, budgets, 10k and statements.
The second step is to determine what business may be suited to a captive approach.
1.2. Selecting Which Business Can Be Insured into a Captive.
The general rule of thumb is that a minimum premium of $5,000,000 is needed to make a captive viable however this can be reduced to around $1,000,000 if a group or 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 required to distinguish between the existing insurance structure and the proposed captive approach. A key issue is whether the company will benefit in the long-term as well as the short term from any captive arrangement.
1.3. The Comparative Analysis
Issues to consider:
(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 set against the projected losses after reinsurance recoveries versus the total captive costs going forward. Example Captive Costs might be as follows:
- Fronting Company Fee: 5.00%
- Captive Management Fee: 2.50%
- State Premium Taxes: 3.75%
- Boards and Bureau Fees: 1.75%
- Safety Engineering Fees: 1.75%
- Claims handling: 5.00%
- Reinsurance: 8.00%
Other possible costs would include the use of an underwriting agency fee if required 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.
(iii) Reinsurance
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.
1.3. Establishing Links with Service Providers
Working with the right service providers is often key to a captive program's success. It is important to ascertain that the professional services required are available and 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 services care needs to be taken that ones chosen are professionally capable as well as efficient.
