Captives are used by the vast majority of Fortune 500 companies to finance their own risk. In fact, as referenced in the previous article, and noted by Captive. com, there are approximately 7,000 captive insurance companies domiciled in more than 70 regulatory jurisdictions worldwide. These captive insurers are set up to insure the risks of its owners as an integral part of risk management programs to contain the total cost of risk. Specifically, a captive insurer is an insurance company that is wholly owned and controlled by its insured members; its primary purpose is to insure the risks of its members, and these insureds benefit from the captive insurers underwriting profit, investment income, tax benefits and unbundled risk services( that they have a say in building).
When a crane owner finds himself in a hard( traditional) insurance market, the business is faced with a continued increase in premiums year over year, often resulting in larger retentions affecting the business’ s total cost of risk. This represents riding the traditional insurance market cycles as status quo, as opposed to taking control of your own destiny with alternative risk financing through your participation in evaluating captive insurance options with your trusted insurance broker / producers. There are many additional benefits with alternative risk financing( captive plans) from a financial and operational standpoint that warrant consideration as opposed to staying with the status quo year over year.
Strategic‘ Xs’ and‘ Os’
In your crane business, you set goals and have expectations for how things should run daily. With an alternative risk financing( captive) model, it is the same situation: you and your administration team set goals in forming and administering the captive insurance functions. These functions include certain fundamental operating elements including: regulatory compliance / claims procedures / financial reporting / shareholder statement reviews / outsource relations with risk service providers / reinsurance, fronting market etc.
Overseeing a captive is comparable to managing a football team where the goal is to build a playbook and field the best team possible to achieve success. In this analogy, the captive program administrator plays the quarterback position in conjunction with your trusted agent / broker, and their first job is to recruit a seasoned, proven captive manager. The captive manager is responsible for ensuring all technical quality controls are adhered to. The playbook for the captive manager incorporates a turnkey approach, so you( as captive customer) can focus your attention on growing your primary business.
Here’ s a five-step primer as an overview for setting up a captive:
Step 1- Determine the Likely Captive Structure: Single parent / association / risk retention group / agency / rent-a-captive / protected cell.
Step 2- Conduct a Captive Feasibility Study: A captive feasibility study is undertaken to determine whether a contemplated risk financing program is feasible for a particular organization / or group via detailed financial forecasting and extensive account operational risk assessments.
Step 3- Interview and Retain a Captive Manager: Focus on expertise in actuarial, regulatory, domiciliary, investment, tax, reputation and capacity( time to do the job right).
Step 4- Select a Captive Domicile: With 70-plus captive domiciles available worldwide, key elements for consideration of domicile( as regulator) should include political stability, access, support services and cost.
Step 5- Preparation and Submission of a Captive Application: Upon determination of a captive structure, feasibility study, choosing captive manager and selecting a domicile, your application should take 60 to 90 days to complete the process.
Captive Feasibility Study
As a crucial extension of the playbook referenced earlier, the captive feasibility
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