header photo Mesa 7/26/2018 10:00:00 AM
News / Finance

Is Your Business A Candidate for Captive Insurance Companies

The Legal Requirements & Funding Levels to Create Captives Are Reasonable

When a company contemplates the formation of a captive insurance company as a part of its risk-financing strategy, it typically conducts a feasibility study. The feasibility study is actually quite often a requirement by domiciles but that should not be the sole reason it is conducted. The critical purpose of a feasibility study is to evaluate the efficacy of the captive investment. That is, the study answers the question, “What can I expect as a return on my investment in this captive insurance company?” While an investment in a captive is not the same as an investment in a new piece of business-related equipment or an investment in a new start-up division of the company, it nonetheless will have a financial impact that must be clearly evaluated and understood prior to formation. Because of the distinct differences between analyzing a captive insurance company investment and a more typical investment related to the business operations, it’s crucially important to involve risk-management advisors who are experienced in performing captive-feasibility studies. We will address the specific components of a feasibility study in chapter 8.

When the feasibility study reveals that a captive insurance company will provide appropriate investment returns for the captive investor(s) (and keep in mind that “appropriate return” does not always mean a direct financial profit), the formation process becomes a reality and the more detailed operational analysis begins (see Appendix C for a sample timeline of all the major components of captive formation). Often, the initial step is writing the business plan for the captive insurance company. A company or group who decides to form an insurance company should never do so without a business plan. Like the feasibility study, a business plan is sometimes required by domiciles; but also like the feasibility study, domicile requirement should not be the incentive for writing one.

Forming a captive should receive the same attention as forming any new company. In fact, it might even require greater attention than some startups, given the regulatory oversight. That means that developing a business plan for the company should be considered a critical tool for the success of the captive.

The content of this press release is from the book Taken Captive by R. Wesley Sierk III and available on Amazon.com.