Captive Feasibility, Implementation & Management
McGriff, Seibels & Williams has been an innovator in the captive services area, by charting new risk solutions related to:
- surety in a captive
- employee benefits in a captive
- using captives as profit centers
- estate planning solutions for privately owned companies.
Our captive partners are chosen to provide the best-of-class service that our clients expect. The expertise necessary to take the captive concept from feasibility study to premiums written is substantial, requiring professionals in regulatory, tax, legal, finance, accounting, actuarial, and insurance. McGriff provides the coordination of these disciplines, combined with our actuarial and insurance expertise. Our ability to work with various business partners gives our clients greater flexibility.
Captive insurance companies have been around for many years and can provide a useful alternative to traditional insurance. Stated more accurately, self-insurance is an alternative to the traditional insurance market. A captive insurance vehicle is just one way to finance self-insured liabilities. There are many “advertised” benefits of captive insurance companies, but only a few real benefits have stood the test of time. A captive may be an appropriate means of risk financing to create specific benefits, including the following:
- Accelerated tax deductions on sufficient volume of annual losses to create benefits in excess of the costs required to capitalize and maintain the captive insurance company
- Annual cost stability by absorbing more or less self-insured liabilities in reaction to changes in the insurance market
- Opportunity to self-insure exposures for which coverage is prohibitively expensive or unavailable in the traditional marketplace
- Tax-efficient means for owners of private companies to transfer wealth to relatives
- External marketing to change the customer dynamics by offering insurance enhancements to customer contracts, rather than unilaterally pushing risk at customers
- Internal marketing to elevate awareness of the self-insurance program throughout the financial and operational culture of the parent company.
While the first four items represent opportunities for financial and strategic benefits, the other two scenarios may only produce such impact if the associated marketing effort is successful. For the latter two scenarios, the real question becomes “Can these benefits be generated effectively without a captive?” In most cases, the client can achieve similar results by other, more traditional means. These may include:
- A separate cost code within the corporate budgeting system
- An aggressive cost allocation system to encourage loss control
- Limited risk transfer programs to permit accumulation of funding and/or post-loss financing
- An exclusive partnership with an insurer to underwrite an insurance program for the client’s customers
Many times there are other risk solutions that are more effective than captive insurance companies. In each case, it is critical to weigh the costs and benefits of a captive relative to these other potential action plans. Our role is to guide our client through the process of identifying and evaluating the various options.
In the early stages of a captive discussion, our actuarial resources meet with clients who have an interest in captives, with the focus being on the high-level pros and cons of captive insurance solutions. Once the captive concept is evaluated from several perspectives, we help interested clients to formalize the various captive scenarios they are considering. Formal evaluation of these scenarios is accomplished via a captive feasibility study.
Our captive feasibility services are completed and customized to address each client’s unique situation. The study typically includes:
- Loss Forecasting—estimation of expected losses at various retentions for future exposure periods
- Jurisdiction Analysis—comparisons of the cost and benefits, plus pros and cons, of the various jurisdictions available for captive insurance companies
- Tax Overview—comparisons of the proposed captive structure with those that have been successful in the past
- Pro-Forma Modeling—financial projections for the captive and its impact on the parent over a 10-year period
- Cost/Benefit Analysis—review of the financial impacts relative to other alternatives, with each alternative measure on a net present value after-tax basis
These services are designed to help our client compare the value of a captive with other available options. A captive involves a long-term commitment of capital and other resources, and it works best when the associated long-term objectives more than outweigh implementation cost. If the client determines that the feasibility work justifies the formation of a captive, we are also available to prepare a business plan to summarize the issues involved in creating and maintaining a captive, including the potential tax and accounting issues, as well as an action plan to make it happen.
While McGriff does have the actuarial expertise to provide key elements of the captive feasibility services, there are various other elements (tax, accounting, legal, etc.) that require highly specialized expertise. In order to provide the most effective captive feasibility services, McGriff will work with external resources to fulfill client expectations. These specialty resources can implement the optimal captive solution and provide the required legal, accounting, finance, and insurance market expertise in any chosen domicile. The combination of captive feasibility services and captive execution services provides the smoothest possible transition for clients starting their own captive.
In the end, it is critical that captive insurance solutions are designed to (i) meet the client’s overall corporate objectives and (ii) coordinate with insurance brokerage efforts that undoubtedly fit around the exposure placed in the captive.
SVP, Chief Actuary