Captive Insurance Feasibility for Your Business

Increasingly, businesses are relinquishing traditional insurance coverage in favor of a captive insurance plan. Captive insurance enables businesses to customize a plan according to their specific needs, fill coverage gaps and emerging risks, and save money for companies with robust risk management policies and a strong claims history.

If your business is considering making the switch, you may wonder what the establishment process looks like.

Today, we’ll discuss three important elements of establishing captive feasibility.

Captive Insurance Feasibility

Crafting a successful captive plan starts with thorough research and planning. Since every business has different needs and risks, the ideal captive structure may vary from one to another.

If you want positive long-term results, you need to lay the groundwork from the outset. Although the specific steps of the captive establishment process may differ, common elements include:

Feasibility Study

Is a captive group health plan a smart move for your organization?

That’s what a feasibility study seeks to answer both in terms of scope and purpose. By establishing a business case, you can review the financial, strategic, and operational benefits as well as the potential limitations of this alternative risk financing strategy.

Performing this review isn’t just wise for your business, it may be legally required, depending on your location and industry.

The focus of the study will typically cover the three C’s of captives:

Control – How will the captive program improve risk management control? This will involve identifying the major risks and comparing the desired program with risk financing alternatives.

Cost – What will be the long-term financial impact of the program? This will involve running loss scenarios in regard to after-tax cash flow models.

Capacity – How will you maximize the value of reinsurance and build up a surplus in order to optimize retention capacity?

Risk Management Study

What are the major risk factors associated with your business and its employees?

To design an effective captive plan, you must be able to fully understand and prepare for the risks your business will face. Effective risk management allows you to take proactive measures to mitigate the loss caused by the risk, if not entirely eliminate them altogether.

This process will entail the following steps:

Step 1 – Create a detailed analysis of the risks that need to remain within the captive.

Step 2 – Perform a historic review of the risk of previous management performance and past claims.

Step 3 – Determine the uninsured risks a business faces.

Step 4 – Estimate the necessary reserves to hold in the captive.

Tax Structuring

A captive insurance plan must be properly structured if you want premiums to be deductible as insurance for federal taxes. They’re usually taxed on underwriting income following the required adjustments.

To qualify as a viable insurance company, the plan must satisfy the following criteria:

Risk transfer – The insured risks need to be transferred outside the at-risk entity.

Insurance risk – The risks that are managed in the captive have to be risks of loss related to insurance coverage.

Risk distribution – Premiums collected by the captive must be adequate to cover the various identified risks.

Maintain the common insurance structure – To maintain liquidity, the captive should write premiums according to risk and create reserves for unpaid risks of loss.

Captive Insurance with Clark & Lavey

Confirming the feasibility of a captive plan is the first crucial step in the captive process. By making the right choices early and properly aligning feasibility, risk management, and tax structuring, you set yourself up for long-term success.

If your business is looking for a captive insurance program, we offer the InCap® Solution, a bold alternative to the traditional employee health insurance plan. It’s one that’s designed to accommodate its owners and provide the optimal solution to escalating health premium costs.