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. Before moving forward with any of these ideas consult your attorney for legal advice and your financial consultant for suitability.