Considering a Captive? Feasibility 101

Companies establish captive insurance vehicles for at least one of the Six Cs of Captive Value — cost, compliance, control, cover, capacity, and commercial — that provide strategic value to the parent organization. The path to a captive insurance vehicle starts with a feasibility study to access the business case, including the financial, strategic, and operational benefits and limitations of alternative risk financing methodologies. A corporation’s decision on the amount of risk to assume is independent and a priority over determining how to finance the risk, whether retained on the books of the parent or within a wholly owned captive insurance company.

There are several steps that go into evaluating a captive program. The feasibility process includes:

• Gather information.
• Review insurance data, loss data, and financial information.
• Conduct captive modeling.
• Develop business plan.
• Determine optimal ownership structure.
• Analyze tax issues.^*
• Analyze investment policy of the captive.
• Review corporate governance.
• Conduct domicile analysis.
• Present final recommendation to the prospective captive owner.
• Provide feedback and an ongoing relationship as the captive implementation and formation progresses.
• Ensure the selected service provider performs captive management services and day-to-day activities.

To perform the study, information requested will typically include:

• Parent company financial information.
• Company organizational chart of legal subsidiaries.
• Tax rates (US, global rates).
• Insurance summary (noting retentions by line of coverage).
• Allocation of payroll and revenue by state.
• Rate of return on parent’s cash flow.

Determining the optimal path for your captive can be a challenge. Our captive model can support the comparison of after-tax total cost of risk for multiple program options. If it is determined that a captive vehicle would benefit your organization, Marsh Captive Solutions, with your tax and accounting teams, can help you to determine the setup that meets the unique needs of your organization.

* _{All such matters should be reviewed with the client’s own qualified tax, accounting, and legal advisors.}