Key considerations when evaluating whether to use a captive insurance solution
Our Deloitte Alternative Risk Solutions Inc. (DARSI) team has the combined industry expertise to help you find the right solution for your needs
You should consider how a captive would fit into your overall corporate and risk management strategies. A captive solution is not a replacement for a sound risk management strategy but rather a mechanism to manage certain risks within an existing strategy. A review of the current risk management strategy will enable you to understand the types of risks you are exposed to and whether the risks are optimally managed based on your unique needs, risk tolerance, and risk management strategies.
Captive solutions can benefit your business by providing broader coverage and increased control when managing risks as a result of the direct access to the re-insurance market. When the commercial market is unable to provide the risk solutions needed, a captive can successfully provide a solution that is tailored to fit the exact needs of your business. It also allows you to select the risks you manage through the captive and customize the terms and conditions of the policies, leading to improved loss control efficiency and promotion of greater awareness of the factors that result in losses.
A captive should be managed within the parameters of a rigorous governance framework to ensure that it not only complies with the regulatory requirements of the appropriate domicile, but also to ensure the long-term sustainability thereof.
There are three key areas to consider when evaluating whether to use a captive insurance solution
The costs and resources associated with the establishment and management of a captive solution must be juxtaposed against the benefits that can be realized.
Establishing a captive will require a capital commitment to fund the initial set-up costs and meet capitalization requirements. Resources will also need to be committed to fulfil the initial administrative requirements.
Ongoing annual operating costs include governance and administration, advisory, re-insurance and regulatory licensing.
A captive ensures that premium rates are set are set at actuarially sound levels, whilst being reflective of the captive’s claims experience.
Underwriting profits and gains from invested premiums that would typically benefit the commercial insurer now accumulate to the captive. As the captive matures over time, the accumulation of capital allows for expanded risk scope and retention levels.
The costs of insurance coverage are not eliminated but can be reduced by facilitating direct access to the re-insurance market. These reductions are dependent upon the degree which the captive can promote increased discipline around loss control and greater awareness of the factors that give rise to losses.
Captive insurance companies can enjoy favourable tax treatment in certain domiciles, with captive tax rates being as low as 0% in some domiciles