Part 1: Understanding Captive Insurance and How to Form One

What Is Captive Insurance?

Captive insurance is a self-insurance strategy where a business forms its own insurance company to transfer specific risks from their operating company to the captive insurance entity. Instead of paying premiums to a traditional insurer, businesses use captive insurance to retain more control over their risk management and financial strategies.

Benefits of Captive Insurance

Captive insurance offers several benefits:

1. Cost Savings: Businesses can save on premiums and reduce reliance on commercial insurers.
2. Custom Coverage: Policies can be tailored to insure unique risks.
3. Risk Retention: Captives allow companies to manage underwriting and claims.
4. Tax Implications: There are tax implications that can impact both the operating entity and captive insurance company.
5. Reinsurance Access: Captive insurance facilitates access to additional reinsurance markets, offering additional cost control.

How to Form a Captive for Insurance

Many business owners ask, “How can I create captive insurance for my company?” Here’s a step-by-step guide:

1. Conduct a Viability Study: Evaluate your company’s risk profile and determine if captive insurance is a cost-effective solution by performing a 5-year look back of risk performance to better understand the impact a captive could have for long-term savings and profitability.
2. Conduct a Feasibility Study: Incorporate the direction of a third-party actuary to develop a proforma of projected performance and premium spend to operate a healthy captive insurance company.
3. Select a Domicile: Jurisdictions like Vermont, Tennessee, Oklahoma, and Ohio are popular for captive insurance due to favorable regulatory environments. For example, captive insurance in Ohio has gained traction thanks to its robust legal framework and support for businesses.
4. Develop a Business Plan: Outline the captive’s purpose, coverage areas, financial projections, and operational structure.
5. Secure Capitalization: Provide initial funding to meet regulatory requirements and cover anticipated claims.
6. Obtain Licensing: Work with local regulators to get your captive licensed.
7. Launch Operations: Begin issuing policies and managing claims through the captive.

Types of Insurance Captives

Captive insurance isn’t one-size-fits-all. Businesses can choose from several types:

1. Single-Parent Captives: Owned by one company to insure its own risks.
2. Group Captives: Multiple companies share ownership and risks.
3. Protected Cell Captives: Offer risk isolation within separate "cells."
4. Association Captives: Formed by trade groups to insure members.
5. Rent-a-Captives: Companies rent the captive’s infrastructure without full ownership.

Part 2: Management, Providers, and Real-World Applications

Who Manages a Captive Insurance Program?

A successful captive insurance program requires collaboration among key professionals:

1. Captive Managers: Oversee daily operations, compliance, and financial performance.
2. Reinsurance Brokers: Facilitate access to reinsurance to cover catastrophic risks.
3. Parent Company Leadership: Ensures the captive aligns with overall corporate goals.

Captive Insurance Providers

Choosing the right captive insurance providers is crucial. These providers help with:

• Captive formation consulting and regulatory compliance.
• Day-to-day management, including claims administration and reporting.
• Accessing reinsurance markets and optimizing risk transfer strategies.

How Does Captive Insurance Work?

To answer the question, “How does captive insurance work?”, let’s explore a common scenario:

Captive Insurance Example: A Manufacturing Firm

A manufacturing company faces rising premiums for general liability and product liability coverage. After exploring their options, they decide to form a captive in Ohio.

1. Viability & Feasibility Study: The company evaluates risks and finds captive insurance could save on premium spend over time.
2. Formation: The company selects Ohio as its domicile for its supportive regulatory environment.
3. Funding: $10 million is allocated as initial capital.
4. Operation: The captive issues liability policies for the parent company. Premiums are retained and invested, growing the captive’s reserves.
5. Reinsurance: To mitigate large-scale risks, the captive buys reinsurance for claims exceeding $2 million.
6. Savings and Control: Over five years, the company saves millions while maintaining control over claims management.

Why Consider Captive Insurance?

For businesses asking, “How can I create captive insurance for my company?” or “What are the benefits of captive insurance?”, the answer lies in its ability to provide cost control, tailored coverage, and financial flexibility. Captive insurance allows companies to transform risk management into a strategic advantage.