Should You Form a Captive Insurance Company?

Your company could save a lot of money by forming a captive insurance company. However, this strategy doesn’t work well for every organization.

Sometimes, it isn’t feasible and could ultimately cost more than traditional insurance. That’s why you must first clearly establish your financial and business goals.

Think about…

Background and financial goals

Actuarial or data issues, including loss data or exposure information needed and insurance company expense loads

Reinsurance marketplace potential

Tax and regulatory issues

You also have to check a few boxes before deciding whether or not a captive insurance company is a viable option:

Feasibility Study

If you believe a captive insurance company may be a good fit, take the following steps to make sure:

1. Review relevant background information
2. Discuss the financial implications of captive formation
3. Project your expected loss
4. Estimate operational expenses associated with the captive to determine the premium
5. Determine the amount of money needed to fund the alternative risk programs
6. Describe factors including location, ownership, support, or other issues
7. Prepare financial statements with balance sheets and income statements for the captive over a five-year period under different scenarios
8. Compare alternative risk to standard market insurance carriers

Issues to Consider

Determine investment strategies based on the assets used to fund the program.

Consider state or domicile premium taxes, U.S. federal excise taxes, U.S. income tax, and 953(d) election (for foreign insurance companies).

Expert Assistance

Morgan, Trevathan & Gunn Insurance can help you work out the actuarial, accounting, tax, and legal issues involved in setting a captive insurance company. We can assist you with:

1. Selecting the Domicile: A “domicile” is the primary location in which your captive insurance company will operate. Select either an onshore (within 50 states) or offshore (outside the United States) domicile. Here you must consider ease of regulation in the area and the quality and quantity of support services.
2. Selecting Partners: Selecting the right risk-sharing partner is critical. This is the entity responsible for claims; generally, a U.S. licensed and admitted insurance company. The partner could be your current, traditional insurer, or you could have time to form a new relationship. Remember that the partner will likely have strong opinions on your plan and may have restrictions or requirements on practices and procedures.
3. Operating a Captive Insurance Company: The captive will be an operating insurance carrier. It must receive funds immediately and invest them prudently so they are available to pay claims. This can be a source of revenue for the captive, but it can also cost the owner substantial sums if badly managed. You must clearly assign roles and responsibilities and conduct frequent analyses on the captive’s financial health to ensure your organization meets its goals.