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Captive Feasibility Study

Why is a Feasibility Study Important?

During the feasibility analysis, a thorough insurance program review is conducted to learn more about existing coverage, exposures, cash-flow requirements, a business's growth forecast and opportunities.

The feasibility analysis comprises five components, each contributing to the overall determination of whether a company should move forward with establishing a captive. The components of a feasibility study are:

  • Domicile Analysis
  • Program Structure Analysis
  • Actuarial Analysis
  • Type of Captive
  • Legal, Regulatory and Tax Structure

Domicile Analysis

Selecting the right domicile for your organization is a complex and critical decision. With the guidance of a captive consultant, a domicile analysis breaks down the domicile decision by reviewing the strategic, financial and operational impacts of forming a captive in a given domicile. This analysis explores the ease of formation, regulatory environment, taxation, costs and exit considerations of legal (and occasionally physical) placement of a captive.

Onshore vs Offshore Captive Domicile

In the past, most captives were domiciled offshore. Today there are few significant differences between onshore (U.S.) or offshore (non-U.S.) captive placement purposes.

Program Structure Analysis

The structure analysis helps determine cost, how retention capacity is built and how losses will impact the insureds of a captive. The structure of a captive will also impact where it can be domiciled, as certain lines of insurance or forms of captives may not be allowed within some domiciles.

Fronting and reinsurance are also considered in the program structure analysis. If deemed appropriate, a market submission and exploration will also take place. The submission will include:

  • The type of captive and domicile
  • An actuarial analysis of the proposed program
  • A detailed summary of the program, including loss control and risk management efforts
  • Current financials of the parent company
  • Proforma financials for the captive

Interactive marketing meetings with the fronting and reinsurance carriers will determine their interest in the program. From there, the captive owner will determine their final selection of carrier partners.

Actuarial Analysis

The actuarial analysis is one of the most important elements of a captive feasibility study. It is integral in determining the appropriate risk retention for an organization.

Using statistical models, the actuarial analysis reviews historical data to make predictions of future events. Proforma financial statements are drafted based upon the actuarial analysis to demonstrate how 5- or 10-year historical losses compare, projecting how a captive will perform in the future. The actuarial analysis then informs the design of the program to ensure the appropriate amount of funding for the desired coverage. This analysis includes:

  • A collection of exposures
  • Cash-flow requirements
  • Coverage needs for proposed captives

Type of Captive

In parallel with the analysis, your captive consultant works with you and your risk management stakeholders to determine what type of captive would be best. Your consultant, in coordination with the actuarial analysis, will create a program structure of the proposed lines of business to include in your captive.

Each organization’s risk profile, domicile determination and strategic alignment will factor into deciding on a captive structure. While some may choose a single parent captive, others may create a group captive or cell captive.

Legal, Regulatory and Tax Structure

As the analysis is happening regarding the captive type and domicile, it is important to consider the legal, regulatory and tax implications of doing business in the selected state/country. Partnering with key internal and stakeholders and external advisors is vital to ensure proper corporate structuring with the creation of the captive.

Once a complete feasibility study has been conducted and an organization has presented the captive strategy to management for approval, they can move forward with implementation.

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