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Captive Insurance Pre-Formation and Feasibility Discussed by Panel
August 14, 2017

The Vermont Captive Insurance Association (VCIA) 2017 Annual Conference provided attendees with educational/informational sessions from the basics to the most advanced. "Captives 101: Where the Mission Begins" provided a foundational course to those new to captive insurance or those needing a refresher on the basics. Among other aspects, the session reviewed captive pre-formation and the captive feasibility process.

The session's panel was comprised of a regulator (Stacey Alden, assistant chief examiner, State of Vermont, Department of Financial Regulation), captive manager (Randall Wachsmann, shareholder, Primmer Piper Eggleston & Cramer PC), captive owner (Joshua Reding, director of risk management, Lifetime Fitness Captive Insurance), actuary (Dan Reppert, managing principal and consulting actuary, Financial Risk Analysts, LLC), and tax professional (Heather Gagnon, audit senior manager, Crowe Horwath LLP).


Ms. Gagnon emphasized that forming a captive is a long-term investment that should be formed for risk purposes and not for tax purposes. While tax benefits are achievable and desirable, Mr. Reding expressed that tax benefits should not be the focus but instead a long-term tool. Receiving the benefit of a tax acceleration is not always black and white. However, once a captive is set up, the benefits will effectively be instantaneous in terms of increased program control related to the following: customized coverage features, control over the claims handling process, ultimate cost control, ability to control investments, and embedded insurance program profit.

The panel reinforced throughout the session that support from the parent organization and strong external support, in the form of experienced service providers, are vital to achieving these benefits completely and fully. Mr. Reppert stated that "once you set up a captive, you are in the insurance business, and how well you do is related to how well you determine what to put in your captive and how you handle it once it is there." In order to do this, adequate internal and external resources are needed, and as the level of complexity increases, so should the number of touch points.

Mr. Reding stated that in going through the captive formation process, in his experience, patience is key and timing is everything. Ownership structure and leadership can change with starts and stops. In the meantime, the captive proposition needs to be sold internally, and a reliable and respected team should be built up around managing your organization's losses day-to-day.

At the same time, Mr. Reding recommended building external relationships and relying on these relationships to help make decisions. Attention should be placed on the careful timing of bringing in external partners (service providers) at key junctures to meet with internal partners to move the proposition forward. It is also a good idea to travel to the domicile to meet with the commissioner and the staff.


Once you have the idea to form a captive, you will need to provide data inputs in order see what the experts think and whether or not forming a captive really makes sense for your organization. This is done through a captive feasibility study, which will provide your organization with the following (remember, good data in, good data out, bad data in, bad data out).



Client Experience, Industry Data, Retention, Reinsurance Structure

Loss Forecast

Captive Expenses, Profit Provision, Risk Margin

Premium Estimates

Premium Estimates

Capital Requirement
(Subject to Domicile Minimum)

Available Capital, Risk Appetite

Retention, Reinsurance Structure

All of the Above

Pro Forma Financials

Pro forma financials are typically compiled by the actuary or the captive manager and provide projected captive results based on all of the items listed in the table above, plus up to 5 years' projections (balance sheet, income statement, cash flow) and base case and adverse scenario, and it may be used as a resource for regulators.

Mr. Reppert emphasized that it can take "a long time to gather all of the information needed to complete the feasibility study." Information includes historical losses, exposures and premiums, and structural information surrounding limits and retentions, as well as reinsurance terms/quotes.

Mr. Reppert explained that after the feasibility study is completed, depending on the organization's risk appetite, multiple actuarial iterations may be needed for reduced retentions, changes in limits options, and any reinsurance options that are entertained.

The panel all agreed that with good and sound risk management, an organization should be able to put out the coverages and limits that the feasibility study looks at. However, the unexpected can happen, which may require additional capital injections that can lead to stresses on the captive if the insured organization is unable to fund additional capital. For this reason, regulators like to see adverse case scenarios projected to demonstrate that the captive can withstand a reasonable stressed scenario.

Ms. Gagnon explained that while a feasibility study is a financially driven and numbers driven document correlated to a business plan, the process for creating each is very different. The business plan can be created by the captive manager and the captive owner, and it takes all of the same data that informs the feasibility study to reveal the picture of where the owner wants the captive to go and grow.

Mr. Reding advised that executive buy-in should be obtained early on and that everyone in the organization should understand that captive formation is not just a tax exercise. Communication is key; all internal stakeholders should be given the opportunity to voice concerns (early on), and each internal partner's concerns should be addressed ahead of time with the help of the captive manager. All partners should understand all of the numbers. Mr. Reding noted that the captive manager can be relied upon to help your organization's CEO to see the captive as a "shiny penny."

Mr. Reding noted that while the final decision should be a rubber stamp (versus a yes or no), the timing might not be right and it is OK not to move forward immediately and to revisit later. Mr. Reding felt that in the case of his organization, "the business plan and feasibility study were instrumental in getting over the finish line."

Find more information on captive feasibility studies on view Captive Feasibility Videos, and read "What Are the Key Elements of a Captive Feasibility Study?"

Pictured above, from left, are Joshua Reding, director of risk management, Lifetime Fitness Captive Insurance; Stacey Alden, assistant chief examiner, State of Vermont, Department of Financial Regulation; Dan Reppert, managing principal and consulting actuary, Financial Risk Analysts, LLC; Heather Gagnon, audit senior manager, Crowe Horwath LLP; Randall Wachsmann, shareholder, Primmer Piper Eggleston & Cramer PC; and Anita Perkins, assistant vice president, USA Risk Group, Inc. Photo is by Jim Eaton, VCIA photographer.

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