Captive Formation and Management
Most businesses seeking a captive solution engage the services of a captive manager. There are many skilled captive managers available. Clear communication from a Captive Manager should be understandable to non-insurance professionals, free of insurance jargon and come with expectations for response. Comprehensive due diligence prior to hiring a captive manager is crucial. This process sets the stage for the success of a business owner’s insurance company. It is imperative that there is good business chemistry before starting the captive voyage.
The process of choosing a captive manager should start with the same fundamentals needed in any business partner. Questions such as:
- How experienced is the captive manager?
- What awards has the captive manager won?
- If the Captive Manager (CM) offers other non-captive services, what percent of their time is spent managing captives?
- Which professionals needed to run insurance companies are on the manager’s team?
- Does the captive manager use 3rd party professionals for annual audits?
- What were the results when a manager’s captive client had an IRS audit?
- What exit strategies does the CM use when a captive is no longer needed?
Now that the captive manager selection process is completed, it is time conduct a feasibility study. Actuaries conduct the study which identifies and measures risk of a business. Claims history from commercial insurance policies is used, as past claims can be an indication of future claims. If a business has a series of similar, ongoing claims, a captive is probably not a good business solution.
There are many steps in risk assessment. Below is an example.
- Step 1 Retain a Captive Manager after careful due diligence
- Step 2 Conduct Feasibility Study
- Step 3 Determine which Captive Structure will best meet a business’s needs
- Step 4 Domicile Selection
- Step 5 Prepare and submit Captive Application to selected domicile
Most businesses interested in Captives have better than average losses, which means the 3rd party insurance company made a significant profit on those policies. Domicile refers to jurisdiction which can be a state in the US, which is considered onshore or offshore which is a jurisdiction offshore. Consider the department of insurance the boss of the captive and certain jurisdictions are more friendly to captives than others. Finally, the captive manager prepares and submits captive insurance applications to the Department of Insurance for the domicile.
Captive management refers to the day-to-day operations which include:
- Tax filings
- Claims processing
Underwriting, compliance, claims processing, along with regulatory and tax changes. Suites of services offered by captive managers can be extensive and designed to encompass all services, while others offer an ala carte menu. Since Captive Managers serve as the Captain of the captive ship, it is important to find the right one.