More organizations than ever are exploring alternative options to traditional insurance coverage in today’s rapidly evolving risk management landscape. One individually tailored solution many consider today is the formation of a captive insurance company.

However, before embarking on this substantial change to your risk management profile, your business must conduct a thorough captive feasibility study.

Union Risk Services presents this guide as a discussion of the purposes and mechanics of a proper captive feasibility study. Our team of experts consults with organizations of all types regarding modern captive insurance options.

What Is a Captive Feasibility Study?

At its core, a captive feasibility study is an in-depth evaluation that helps assess whether a captive insurance solution is viable and advantageous for an organization.

The analysis examines an organization’s risks, financial stability, and operational readiness. It also considers the legal and regulatory factors that affect its industry. Captive insurance law can vary significantly from state to state in the U.S., and a precise study of the applicable rules is essential.

The study must also provide all relevant stakeholders with sufficient information to make an informed decision about whether forming a captive serves the company’s best interests and fits in with its overall objectives.

The Core Areas of Captive Feasibility Studies

Captive feasibility studies focus on three primary areas — control, cost, and capacity. These elements determine whether the organization has a solid foundation for establishing a captive insurer.

Control

One of the most important reasons an organization has the motivation to form a captive insurance company is the desire for more effective control over risk management. A proper captive feasibility study determines whether forming a captive will actually improve the organization’s control over underwriting, claims management, and risk retention.

Cost

The feasibility analysis examines the overall net financial impact of creating a captive. It compares the cost of traditional insurance programs to the potential savings a captive may provide.

A transparent and properly conducted cost-benefit analysis provides stakeholders with the information needed to evaluate cost savings and the impact on overhead and operational functions.

Capacity

Capacity refers to the prospective captive insurance company’s ability to retain and manage risks. A captive formation study evaluates whether the captive has the capital and resources to properly cover its intended and expected risks.

This analysis must consider potential loss scenarios and the captive’s capacity to build surplus or manage sufficient access to reinsurance markets.

Key Components of a Captive Feasibility Study

A comprehensive captive feasibility study typically includes several essential components.

Risk Assessment Evaluation

The first step is accurately identifying and analyzing the company’s risks. This involves evaluating existing insurance coverage, loss history, and any potential coverage gaps.

This part of the study also determines if a captive would provide more effective self-insurance planning and risk management strategies based on an organization’s real-world risk profile.

Domicile Analysis

Domicile refers to the jurisdiction chosen as the location for forming a captive insurance company.

A comprehensive analysis looks at both onshore and offshore options and considers regulatory frameworks, tax considerations, and formation and management costs. Choosing the proper domicile can make all the difference when deciding if a captive can have long-term success and sustainability.

Program Structure Analysis

This analysis focuses on how the captive’s structure can meet the organization’s risk retention needs. Key factors include retention capacity, reinsurance arrangements, and the specific types of insurance the captive will cover.

Additionally, the captive insurance analysis evaluates fronting and reinsurance carrier options. Reliable access to those coverages in all circumstances is essential to long-term viability.

Actuarial Analysis

Detailed actuarial reviews project future losses and determine the capital reserves needed for the captive. This analysis uses statistical models to forecast loss frequency and severity. Those models enable stakeholders to properly determine the proper levels of funding required to cover claims and remain financially viable in the event of losses.

Legal, Regulatory, and Tax Structure

As discussed above, a captive feasibility study must also evaluate the legal and regulatory requirements for forming a captive in the chosen domicile.

After determining the optimal jurisdiction for formation, the study analyzes the expected tax implications, regulatory and compliance requirements and costs, and the governance standards that will apply to the captive.

Steps to Conducting a Captive Feasibility Study

Organizations typically follow a structured process when conducting a captive feasibility study.

Define the Scope and Objectives

The business should clearly define the purpose of the study and outline the risks and insurance needs the captive will address. This sets the framework for the analysis and ensures investing in the study will properly align with the organization’s goals.

Gather Data

A business can streamline the process by carefully collecting the data needed for the study. This includes historical loss data, current insurance policies, and accurate financial projections.

Perform the Analysis

Conduct the necessary captive insurance analysis discussed above, including risk, financial, and operational assessments.

Present Findings and Make Recommendations

Management should present the study to stakeholders along with recommendations about whether to move forward with forming a captive.

Develop a Business Plan

Based on the findings, an organization can decide whether to proceed with forming a captive insurance company. A revised and comprehensive business plan should outline the captive’s structure, capital requirements, and operational strategy.

It should also clearly lay out the steps necessary to form the captive and make sure there are no gaps in coverages while transitioning risk management to it.

Rely on Union Risk Services for Comprehensive Risk Management Services

All organizations considering captive insurance as part of their risk management strategy should consider a captive feasibility study an essential tool.

Informed decisions about fundamental risk management must rely on competent risk assessment, transparent and accurate financial evaluations, and a meaningful understanding of the legal and regulatory landscape.

Union Risk Services specializes in providing comprehensive risk management solutions — including evaluating captive insurance programs through our turnkey approach.

Contact us today to learn more about how we can help your organization navigate the complex world of risk management and captive insurance options. Request assistance now.