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When to Consider a Captive
A captive
insurance company is not a suitable option for all
insureds, in all situations. Before exploring the
feasibility of a captive, an insured and its advisors
should determine whether the following criteria have been
met. These criteria are an indication of whether a captive
program could make sense.
1. Good loss experience
The insured will be assuming responsibility for the
payment of losses under a captive program. If historical
loss ratios are high, then it is likely that the captive
option will result in considerably increased cost for the
insured. As a rule of thumb, captive expenses
including fronting and reinsurance costs usually comprise
35-40% of captive premium. If loss ratios are greater than
65% of premium, then the captive is likely to be a more
expensive option than guaranteed cost insurance, unless it
can underwrite direct and avoid the cost of fronting.
2. Available fronting and reinsurance
The market for fronting services has become restrictive
for captives. The viability of many captive programs is
dependent on the availability of a front at a price that
does not make the program cost prohibitive. Situations
that do not require fronting services can make the captive
option more feasible.
3. Financially secure parent
An insured considering a captive will need sufficient
financial resources to support the capital investment and
the posting of collateral behind the captive program.
Regulators are unlikely to approve a captive unless the
parent is financially secure. In addition, most
fronting companies will require collateral to match the
aggregate participation of the captive. The stacking
of collateral requirements over a number of years can
create a significant financial burden on the parent.
4.
Sufficient premium volume
A minimum level of premium volume is required in captive
programs to provide stability, absorb
the operating costs of the captive and provide a return on
the capital invested. While there are captive structures
specifically designed to accommodate smaller programs,
traditional captive programs typically require a minimum
of $750,000 in premium annually to make them viable.
5. Long-term commitment from the insured(s)
Captives are a means for insureds to reduce their reliance
on the commercial insurance market and provide stable
long-term risk financing. Captive programs will not be the
lowest cost option in all years, so to be successful they
will require a long-term commitment from their owner/insureds.
If an insured is considering a captive purely for
short-term premium savings, it is unlikely to be the right
solution.
6. Predictable losses
Captives work best for programs that have predictable
losses. The more predictable and consistent the losses,
the greater the confidence with which premiums and
reserves can be set for the captive program. Volatile
lines of coverage can be problematic for captives as they
are difficult to quantify. Lines of coverage with short
claims development patterns can also be problematic as the ability to
hold reserves against potential future losses is limited.
The SRS Guide to Captives contains
historical information that may no longer be accurate. It
is for informational purposes only and does
not constitute advice. No
reliance should be placed on the information contained
within this portion of the site and guidance should be
sought from SRS regarding captives and alternative risk
solutions. No information contained in the SRS Guide to
Captives
may be reproduced or copied in any format without the
express permission of SRS.
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