Captive Implementation

The captive evaluation process is multi-faceted. While the feasibility study produces a domicile analysis, program structure analysis, actuarial analysis and legal, regulatory and tax structure assessment, these elements merely help determine if a captive is a viable option for a business.

Once the decision has been made to pursue a captive, the implementation process can begin.

Necessary Documentation for Captive Implementation

Because a captive is its own legally licensed company, the captive must be incorporated, which requires specific documentation based on the domicile selected during the feasibility process. This typically includes, at minimum, articles of incorporation and bylaws (internationally known as memorandum and articles of association).

The application for licensure will contain the legal documents mentioned above, as well as information regarding the operation of the company, comprising:

• A codified business plan (and reinsurance plan, if agreed upon)
• A minimum 5-year projection of financials (occasionally 7-year projections)
• Detailed bios of every member of the board of directors
• Selection of local professionals in domicile
• Finalized coverage and policy documents

Service Provider Selection

Some basic service provider selections need to be made before licensure is granted and underwriting commences. This will include auditors, directors, attorneys and captive managers. Due to the complexities of tax laws surrounding captives, a trusted attorney/tax advisor is crucial to compliance and overall captive success. Additional service providers may need to be selected based upon the program structure such as third-party administrators (TPA).

Selecting a Board of Directors

The selection of the board of directors is not just honorary. If required, the board will be fulfilling the duties very similar to any other board of directors: Duty of candor, duty of loyalty, duty of care and fiduciary duty are important elements for board members. The board sets the tone of the captive, makes decisions and takes appropriate actions to protect its policyholders.

Captive Business Plan

The business plan describes how and why the captive is being formed. These plans outline:

• The business operations of the parent companies and how they are currently insured
• The type of captive being established and the reasoning behind the selection
• The lines of business or coverage being insured
• Capitalization and expected premiums
• Operating ratios and underwriting ratios

The business plan also outlines the management team, board of directors, captive manager, services providers and organization chart.

These business plans must be submitted to regulators before licensure is issued. The right captive advisor completes the business plan on behalf of the parent companies.

As the regulator reviews the application and meets with the board, a bank account is established and capitalized, with payment of share capital and shares allotted to appropriate recipients.

From there, the legal entity is established, the board meets and completes any necessary requirements, the license is issued, and underwriting can commence.

Submit Appropriate Documentation

Many domiciles encourage future captive owners to meet with them to discuss their proposed captive business plan in advance of submitting an application for licensing. This allows regulators to meet the business owners and establish an understanding of the proposed captive business while creating a relationship with the captive domicile regulator.

As the regulator reviews the application and meets with the board, a bank account is established and capitalized, with payment of share capital and shares allotted to appropriate recipients.

From there, the legal entity is established, the board meets and completes any necessary requirements, the license is issued, and underwriting can commence.

Who is Responsible for Captive Implementation?

The captive implementation process involves various parties, each responsible for different elements.

Captive Owner

The captive owner is responsible for:

• Meeting with the state’s Department of Insurance
• Selecting service providers
• Selecting the board of directors
• Rounding up biographical affidavits
• Start-up fees

Attorney

The captive attorney:

• Reserves captive name
• Drafts articles of incorporation and bylaws
• Establishes Federal Employer Identification Number
• Managing corporate agreements

Actuary

The actuary:

• Conducts loss/funding projections
• Creates financial forecasts

Once these elements are compiled, they are then delivered to the captive manager.

Captive Manager

Upon receiving the necessary information from the captive owner, attorney and actuary, the captive manager completes:

• Captive application
• Business plan
• Application assembly
• Task management

Once the implementation process is completed, the captive can commence operations.