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This remark from a real client neatly sums up captive exploration: simple in concept, complex in practice.
Forming a captive means that your business will own an insurance company, pay for its own losses, and pocket any profit. The “what” makes sense. The “how” is more tricky.
Imagine that you purchased a plot of land. You can visualize living in your dream home. But, building it is an intricate dance involving numerous professionals, regulations, and significant financial investment.
And still, millions of people do it enthusiastically. That’s because the process is predictable and the reward is secure, despite the risks.
Starting a captive is like building an insurance dream home. Complicated, but predictable and quite rewarding. The result is owning your own insurance–and all its profit.
Among Fortune 500 companies, 90% own at least one captive. They trust the process and the payoff. Critically, they also have the resources to dedicate an in-house team to the task.
XN estimates that forming a captive takes 300 to 400 total hours of work, input from 10 distinct expertise, and the coordination of many overlapping work streams. For a mid-market business focused on growth, the investment is daunting.
Thankfully, there is a realistic path forward. Enter The Captive Manager.
Captive Managers can drastically reduce the workload by providing expertise, coordination, and management services to demystify and streamline the process–like the general contractor that orchestrates the construction of your home.
Every captive management firm is a little bit different, from the services they offer to their pricing structure. Some specialize in certain types of captives, others in certain industries or lines of coverage.
The nuanced role of captive managers is incorporated throughout the discussion below.
The captive journey begins with an upfront assessment, akin to a soil test before building a house. You lay the groundwork with a Captive Manager by discussing your business, insurance needs, and objectives. This is also an opportunity to gauge the manager's approach and align their expertise with your needs.
The Assessment is a crucial yet non-committal step, often offered as a free consultation.
During the Assessment, you will likely discuss the implications of a few key decisions, including:
Once your assessment is complete, the process to form your captive officially begins with your decision to initiate a Feasibility Study.
A Feasibility Study is the architectural blueprint of your captive, a data-driven analysis performed by actuaries. Depending on the complexity involved (namely, the types of coverage under consideration), the study can cost between $20,000 and $50,000. It's a significant investment, owed to the extensive time and specialized expertise required to validate the business plan for your insurance company. XN works with its clients to help make feasibility studies more seamless. To learn how, contact us.
Some of the aspects under assessment include:
The Feasibility Study mirrors the unseen analytical process behind traditional insurance policies, setting costs and coverage based on actuarial science. You are creating an insurance company after all, so this work is necessary to ensure that you are prepared.
Fittingly, the Feasibility Study process is collaborative. Actuaries provide the scientific rigor to validate the intentions you have for your captive. The combination of the two allows your captive to safely meet its goals.
As such, this stage may require adjusting your expectations. But, like learning upfront that your dream home needs a different type of foundation, it's for the better. Actuaries are not just calculating numbers; they're safeguarding your investment against potential challenges.
Completing the Feasibility Study is not a commitment to build a captive. It is simply part of the required documentation that would eventually be approved by regulators, if and when you proceed.
Actuaries collect your business and insurance information to start their analysis. Most of what is needed can found in the following documents:
Once the analysis starts, the first deliverable is often a Loss Projections and Premium Analysis.
Loss Projection: An estimation of future losses, or Loss Distribution, for the coverages under consideration, factoring in Loss Probability (the likelihood of experiencing a given level of loss). Here is an example of how that might look:
The Loss Probability determination is used to define your captive’s capacity–the max amount of loss it can support.
Loss Projections include the full spectrum of anticipatable losses. From that range, actuaries select a Loss Pick, the official estimation of losses that will determine your captive’s Premium.
The loss pick is typically conservative enough to protect the captive against unforeseen circumstances and pass the scrutiny of regulators. Each actuary firm applies their own standard to selecting a loss pick, with calculations to support their reasoning.
Premium Analysis: This is the total amount you need to fund the captive, with extenuating context like regulatory concerns. It typically contains a Pricing Summary, with various Retention Level scenarios.
This information adds clarity when determining the financial cost of retaining the desired amount of risk.
The premium analysis will incorporate regulatory considerations into the report, like capital and collateral requirements. Each domicile will have different rules based on the lines of coverage, policy limits, loss projections, required collateral, and fronting circumstances.*
*During the course of the Feasibility Study, a Captive Manager will work to develop a cost estimate for elements like reinsurance. These estimates (and eventually, the actual amounts once finalized) can be provided to the actuaries to incorporate into their financial projections that come in Phase 3. For more information on these processes and how they are used, visit our blog posts on Fronting and ReInsurance.
Below is an example of a Pricing Summary, which presents two options for how much risk will be retained by the captive, also called the Retention Level:
The Pricing Summary allows you to:
Note: Multiple methods may be used to determine a reasonable premium amount, and oftentimes additional methods are provided by the actuaries, allowing you (and regulators) to review the reasonableness of the premium level suggested by the report.
Once the initial analysis is complete, the actuaries develop a financial model to simulate your captive performance, often 5 years into the future, with expected and adverse scenarios. It will also indicate the elasticity of the cost allocations developed in the Pricing Summary.
The Pro Forma will include:
An example report is provided below to demonstrate the elements of a captive Pro Forma:
Income Statement
Balance Sheet
Cash Flow Statement
Following the Feasibility Study, the focus shifts to finalizing a Captive Business Plan.
This document packages the Feasibility Study with an explanation of your captive's strategic direction, management framework, and operational readiness.. It's the definitive guide that regulators review to approve your captive, highlighting its preparedness for success and compliance.
Some captive managers will prepare the business plan for you, and present it for review.
Most Captive Business Plans will include the following sections:
At the conclusion of the process, your state’s Department of Insurance will issue a license officially authorizing your captive to provide insurance to your parent company. Congratulations are in order—you now own your own insurance company!
The path to owning a captive is a significant undertaking that blends complexity with opportunity.
XN streamlines the captive journey, making it accessible, manageable, and optimized for mid-market companies. Our platform provides powerful tools for planning, real-time monitoring, and in-depth analysis, all designed to maximize your captive's potential.
To discover how XN can transform your captive strategy, visit our Services page.
