Forming a Captive Requires Understanding Some Key Considerations

Captive insurance is a viable option for many organizations as long as they keep in mind several key considerations, according to panelists speaking Monday at the Western Region Captive Insurance Conference (WRCIC) in St. Louis.

"It seems like for most businesses, it makes sense assuming they have capital they can put into it on the front end," said Kyle Mrotek, principal and consulting actuary at the Actuarial Advantage. "And, also, it's important that they have enough cash flow that they can float that opportunity. And they also need to be big enough that they can handle the frictional costs."

It's also essential to recognize that a captive is a licensed, regulated insurance company, noted Rae Brown, assistant vice president—captive insurance solutions at GPW and Associates Inc.

And prospective captive parents must recognize that a captive is a long-term commitment. "A captive is not for day trading," Mr. Mrotek said. "You don't just do it to solve a problem for a month. It's a long-term play."

"It's a long-term value proposition. It's not for the faint of heart," said Ms. Brown. "I always tell people you're not dating your captive; you're marrying your captive."

Mr. Mrotek, Ms. Brown, and Tim Svoboda, vice president and captive consultant at Conner Strong and Buckelew, discussed various considerations around forming captive insurance companies during a WRCIC session titled "Captive 101."

"For the most part, captives are really formed to be part of the parent company's risk strategy," Ms. Brown said. But, while a captive is part of the risk strategy, it can be a financial play as well. For organizations with sound loss control programs in place with loss expectations lower than those in the traditional insurance market, a captive can deliver cost savings, she said.

Another potential benefit of captive insurance is that, in some cases, captives can take advantage of favorable rates in the reinsurance market that the captive's parent couldn't get access to on its own.

And, said Mr. Svoboda, "Sometimes you're able to find additional capacity in the reinsurance marketplace that isn't available in primary markets."

In addition, as traditional insurance markets change from year to year, the captive parent can be opportunistic in determining how to deploy the captive's capital, Mr. Svoboda said.