Forming a captive company

Before forming a captive as minimum a feasibility study should be carried out. A feasibility study will normally include 7 steps.

1. Executive summary

A brief summary of the areas covered in the study, findings including a summary , 5 year business plan, and recommendations for proceedings.

2. Formation & operational issues

The rationale and strategic objectives for forming a captive should be covered in the feasibility study. The study should also cover the type of captive company that is being suggested, the operational structure of the company, whether it should be self-managed, partly or fully outsourced, the name suggested by members of the Board of Directors and how to ensure compliance issues etc. An ideal Board of Directors should be a blend of competencies including legal, accounting, investment and insurance skills.

3. Domicile issues

Where to incorporate the captive insurance company is one key decision point which should be covered in the feasibility study. It is important here to consider the political environment, competence and accessibility of the supervisor, insurance legislation, tax regime, availability and competence of management services and supporting infrastructure. Within the Solvency II regulatory area or outside.

4. Accounting & taxation issues

Will the accounting standards IAS and GAAP have an impact on the captive company and the group’s consolidation? What level of capitalization is needed and in what form is it required? In relation to the latter Solvency II requirements need to be considered. Ensure that solution is compliant with applicable taxation rules. In addition to this ensure that the solution qualifies as insurance.

5. Underwriting considerations

The feasibility study should cover the level of own risk taking. This should include monetary limitations and classes written and classes not written. It should also cover the reinsurance needs and the minimum rating requirements for reinsurers.

6. Costs

There are several cost items for a captive insurance company which needs to be covered in the feasibility study. Examples include initial start-up costs, supervisory application and running charges, internal and/or external (if outsourced) administrative costs, bank charges, collateral costs, legal advisory costs, investment management costs, insurance premium taxes and related fees.

Consider increased administrative costs due to Solvency II in relation to e.g. mandatory centralized functions and a higher demand for capitalization.

Finally, also consider the quality of the reinsurance panel as this will affect the capital requirements under the Solvency II regime.

7. Financial projections and Business plan

The financial projections should basically consist of the next 5 years Balance sheets, Income statements and Cash flow statements. The business plan is a written document which depicts the operational plan for the captive, including classes of business written, expansion plans, reinsurance strategies, capitalization, compliance and the control functions of the company.