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.
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.
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.
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.
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.
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.
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 above information is provided by Strategic Risk Solutions, (www.strategicrisks.com) captive manager for Green Mountain Sponsored Insurance Company, for the benefit of our clients.
Over 1,000 companies have already realized the advantages of captive insurance operations licensed in Vermont. In fact, for several years now, Vermont has ranked as the number one captive domicile in the United States and the number three-ranked domicile internationally.
Vermont’s success to date can be attributed to a combination of factors, not the least of which is the ongoing leadership of Vermont’s Governors, both past and present, and both houses of the State Legislature who continue to uphold Vermont’s longstanding tradition of providing solid support for this state’s captive industry. This fact ensures that as captive industry needs change, captive legislation in this state evolves and is further enhanced with timely and meaningful changes made to Vermont captive law.
Vermont continues to be recognized as a quality domicile by captive owners, brokers, regulators, and others in the industry due to its high level of professionalism. An ever-increasing number of companies are further recognizing Vermont as their captive insurance domicile of choice.
Managed by Strategic Risk Solutions, Vermont’s leading Captive Management Firm all Green Mountain clients are guaranteed a level of service that is second to none.
Providing a full range of captive management services in the formation of captives and their on-going operation, SRS services are tailored to fit the individual needs of our clients. We enforce a strict peer review process to ensure the accuracy and quality of our work including an annual stewardship report detailing our activities during the year.CONTACT US