Captives can be valuable strategic risk management tools, but they are not the best approach for every business. For some risk profiles, they are not feasible, and could ultimately cost more than traditional insurance. If your business is considering setting up a captive insurer or looking to join an existing, you must first clearly establish the financial/business goals and objectives of the company. Effective communication between senior management, including the CFO, risk manager and business segment leaders is critical. Together, consider the follow aspects of your company:
- Actuarial or data issues, including loss data or exposure information needed for at least 5 years.
- Reinsurance marketplace potential
- Tax and regulatory issues
- Desired captive design
Several parameters can assist you in determining whether a captive is a viable option:
- You must be financially stable and have a good loss history.
- You must be able to demonstrate your ability to pay for claims and secure future losses. Collateral will be required & full disclosure of financial statements.
- You must be able to dedicate considerable attention to the operation of the captive.