Understanding Captive Insurance Companies Series – Part 3 of 3: Formation and Operation

ConstructionA captive is a closely held insurance company established to insure the risks of its parent company and affiliated groups.  In parts one and two of this blog series, we discuss the benefits of a captive and the questions that should be asked before forming a captive insurance program. If a captive seems like a good fit for your business, use these tips for forming and operating a captive:

  • Feasibility Study:
    1. Answer the essential question: “What will my return on investment be by using a captive?”
    2. Include an analysis of risk to be insured, reinsurance, capitalization, an operational plan, five year prospective financial statements and dividend and/or profit allocation system.
  • Implementation:
    1. Client Instruction
    2. Retain and coordinate service providers/TPAs
    3. Finalize reinsurance application
    4. Draft business plan
    5. Submit application to regulator
    6. Receive approval letter
    7. Finalize articles and bylaws
    8. Receive Certificate of Authority
    9. Capitalize on captive
    10. Reinsurance is bound
    11. Captive is operational
  • Management Considerations:
    1. Maintain compliance in domicile
    2. Monthly Accounting
    3. Underwriting and Policy Issuance
    4. Annual Captive Audit
    5. Tax Return and Related Filings
    6. Actuarial Reserve Analysis
    7. Attorney Services
    8. Corporate Formalities

Have your insurance broker perform a detailed evaluation of the pros and cons of a captive. The analysis should cover types of captives available, the structure of those captives, risk financing methods, estimated cost comparisons, upside/downside/break-even point, a five–year collateral forecast, and group captive lifecycle for a single policy period. To determine if a captive program would be beneficial to your organization, or to learn more about AssuredPartners NL’s construction services, visit AssuredPartners NL Construction.

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