A captive insurance company is a licensed and regulated insurance or reinsurance company owned by a non-insurance company for purposes of insuring or reinsuring the risks of its owner or owner’s affiliated companies.
Creating a captive insurance company can provide an innovative solution to your risk financing needs and enhance the financial and operational performance of your organization. But for businesses yet to run a captive, there is much to consider; from understanding the feasibility of your captive and applying for it, to understanding the roles and responsibilities of the board and other functions. You’ll also want to understand the annual reporting cycle and how to get the most value from your captive.
This insight is based on June 2023’s Captive Owners’ Forum (which you can access by completing the form on this page) and covers:
A feasibility study is a crucial step in setting up your captive. It will help to define the projected costs of establishing the captive, the ongoing costs of operating it and the wider financial commitment required.
Key stakeholders will be involved in developing the feasibility study with the major components being to understand the losses you are looking to address within the captive and the organizational risk appetite. You should determine both with collaboration across the business and using actuarial forecasting to examine factors included the expected per claim and per occurrence retention, and aggregate protection. This work should also take in the level of confidence over losses, calling on your own and/or industry data.
The feasibility study will also assess expenses, such as fronting fees charged by the insurer to provide all of the services involved with the programme and to assume the credit, operational, regulatory, tax and legal risk. Other expenses you need to consider at this stage include excess insurance/reinsurance, claims administration costs and general captive admin and management costs, such as actuarial, audit and legal, domicile fees/taxes.
The final element to examine is the capital you will need to set up the captive, which will vary between domiciles, with your feasibility study assessing variations between domiciles.
Further factors that influence capital requirements include the lines of business and level of risk you plan to use your captive for. You should make financial projections on capital based on different loss and growth scenarios to make an informed decision as to whether to proceed with the captive or otherwise in light of this and all other considerations.
If your organization goes ahead with setting up a captive, your captive advisors will help you navigate the regulatory application and approval process.
The financial regulator (‘the regulator’) of the jurisdiction where the captive is to be set up will want to know the key objectives for your captive, the lines of business that will be held within your captive. It will assess two key areas in this context: the financial strength of the shareholders and robustness of the business plan, plus the way the company intends to operate.
In assessing the financial strength of the shareholders, the regulator will carry out a detailed due diligence on the immediate parent undertaking (that is, the company that directly owns the captive) and, if applicable, the ultimate parent undertaking if the captive is indirectly, and the ultimate beneficial owners of the ultimate parent company.
The regulator assesses the robustness of the business plan (also known as ‘scheme of operations’) by analysing it in detail.
Your business plan should specify a number of key areas including:
The regulator has the following number of pre-defined conditions to grant an insurance licence to which your captive company will need to abide, including:
In addition, any changes to the committee members, board directors and shareholders will require regulatory approval.
In terms of timings to establish a captive, this can vary depending on the type of captive, ranging from two weeks to over two years to develop and execute a captive proposal.
Running your captive day-to-day will rely upon a system and structure of governance. A typical arrangement might look like this:
The claims function is concerned with:
The financial and regulatory reporting function, meanwhile, is required to:
The compliance area is required to consider aspects of compliance, including compliance with all regulatory filings.
The risk management function should set out an annual risk management plan, assist the board in developing a risk management strategy and framework, define the risks existing in specific areas, develop written risk management policies and procedures, as well as identify and assess new emerging risks. The risk management function must also prepare both the Own Risk and Solvency Assessment (ORSA) which is the Board’s assessment of the capital required to write the relevant lines of risk, as well as internal and supervisory reports.
Finally, the actuarial function must deliver effective implementation of the risk management system, Regulatory Solvency Captive Requirement (SCR), which is the capital required by the regulator and input into the ORSA process, amongst other responsibilities.
For a ‘typical’ captive there will be three key board meeting per year focused on financial review, a mid-year strategic review, and an end-of-year meeting centered on renewals and reserving:
Once your captive is up and running, using analytical tools and methods can identify patterns and discover hidden value in your captive risk portfolios. This might include predictive modelling of risks on single line or portfolio bases, looking again at risk tolerance and/or developing the risk appetite. Alternatively, this can focus on specific optimization themes such as climate risk quantification using scenario modeling, to identify new potential revenue streams.
Analytical optimization exercises can improve your decision-making, risk prioritisation and capital allocation by using clear, consistent and quantified analysis of the uncertainty around financial projections and strategic plans. This can improve corporate governance, senior stakeholder management and related communications and ensure your captive continues to deliver demonstrable value.
To get more detail on how analytical optimization works in practice with a worked example, as well as more insights on how to apply for, operate and govern your captive, watch the Captive Owners’ Forum webinars by filling in the form at the top of this page.
To understand smarter ways to optimize risk within a captive, get in touch with WTW Captive specialists.