5 Key Factors a Company Must Consider Before Forming a Captive

Captive Insurance

5 Key Factors a Company Must Consider Before Forming a Captive

Forming a captive is almost identical to forming a company. The parties involved must clarify goals, consider potential partners and follow established protocols. Indeed, when forming a captive, you and your partners are forming a limited liability insurance company. Here are some factors to consider, and some captive insurance technology solutions to implement, before forming your company.

Assess Financials

A captive insurance company requires start-up funds that can cover the cost of a feasibility study, taxes, operating expenses and consulting. Operating and consulting expenses typically include actuarial, legal and regulatory costs. For organizations that might not have the economic strength to move forward with a captive insurance company, there are other structures that might make more sense.

Determine Structure

Organizations that lack the fiscal strength can make use of “rent-a-captive” structures. In this situation, the captive is run by a third-party, either a captive management company or an experienced insurance broker. Smaller organizations choose this structure while they work toward creating their own captive organizations.

Groups wishing to form their own captives can form their own insurance company, one that is separate but affiliated with the parent company, which controls the risks of the parent company. This is referred to as a single-parent captive. This structure suits large organizations. Smaller organizations within similar industries might choose to band together and form an association, cell, or group captive. In many arrangements, the members own the captive and share the risk with a large reinsurance company.

Captive Insurance Structure

Risk retention groups, agency captives and micro-captives are other structures you might consider. If your organization is interested in pursuing these structures, digital captive insurance technologies solutions will lower cost of operation while assisting in the management and operation of these entities.

Evaluate Underwriting Options

One element that all captive and group insurance companies hold in common is the need to retain a profit and minimize risk. This is accomplished by optimizing underwriting tools so that captives can determine unrelated risks and create lean policies that protect the insureds without the costs of over-protection. Captive insurance software provides policy and underwriting administration tools that forge customized solutions for non-traditional insurers.

Outsource Captive Management

Captive Insurance managers and consultants understand the ins-and-outs of the insurance industry. These consultants make use of up-to-date captive insurance technology to conduct data-driven feasibility studies, determine the best location for your captive’s domicile based on the latest available regulatory guidelines, assist with the preparation and submission of the captive application and manage the day-to-day operations of your new insurance company.


Position for Profit

In order to receive tax benefits from a captive, the organization must be a legally recognized insurance company within their domicile. An outsourced captive manager is an essential partner when navigating legalities and forming a captive.