Ask The Captive Expert - FAQ's

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Q: July 2015:Can you provide access to any exemplar insurance contracts between a captive insurer and an insured party? If so could you please direct me to them? Click here for the answer.

Q: May 2015: Where can I find a book, white paper, textbook . . . anything in the form of basic understanding of actuarial reports? Click here for the answer.

Q: April 2015: What factors should be considered in determining the optimum size of a heterogeneous group captiveClick here for the answer.

Q: August 2013: What are the differences between a Risk Retention Group and a Mutual Insurance CompanyClick here for the answer.

Q: March 2013: I have been told that it will be nearly impossible to get a fronting company for an 831(b) formed to provide captive layer coverage for health claims. It this true? Is a pure captive with multiple employers my only option? Click here for the answer.

Q: January 2013: Would an RRG comprised of self-funded groups, for the purpose of employee benefit coverage, be subject to PPACA mandates? Click here for the answer. 

Q: January 2012: I have a client, a large native American tribe with large government and gaming operations.  Would forming or joining a captive program have as much merit for them considering there are no tax advantages to them since they are a tax-exempt entity? [Editor's note: This question also applies to any tax-exempt entities such as hospitals and other health care entities] Click here for the answer.

Q: July 2010: Can a Captive be formed as an "S Corp" or or does it have to be a "disregarded entity"? Click here for the answer.

Q: April 2010: We are interested in forming either a captive or a RRG. How are management costs typically determined? If as a percentage of premiums or funds managed in the RRG, what might a typical percentage be? Click here for the answer.

Q: What are the advantages of paying higher premiums than required to pay for claims, and then later receiving a dividend of the excess premiums paid? Reserves are sufficient. Click here for the answer.

Q: What is the advantage of having a feasibility study done by an independent firm, rather than a broker or vendor? Click here for the answer.

Q: Is it common in cell captive companies for each cell to have its own investment manager and investment guidelines? Or would it be more common for all cells to use the same investment manager and have the same guidelines as the core? Click here for the answer.

Q: Are captives or RRG's allowed in ConnecticutClick here for the answer.

Q: What is a Reinsurance Captive and how is it used? Click here for the answer.

Q: Our company accrues about $700,000 in warranty expenses. Would it make sense to create a captive insurance company to insure these warranty expenses, and what types of benefits could we expect to see? Click here for the answer.

Q: Can captives be used for coastal property insuranceClick here for the answer.

Q: It is my understanding that industry standard is to record a Letter of Credit as both an Asset and an Equity item (when the LOCis used to capitalize the captive). Is there any authorative guidance, pronouncement, interpretation, etc. that supports this "industry standard"? Click here for the answer.

Q: From an accounting company: What are the major business processes involved in a captive? Is there an audit program you are aware of for a captive company? Click here for the answer.

Q: What benefit can on-shore holding companies provide to an off-shore insurance strategyClick here for the answer.

Q: How might construction managers utilize captives? Click here for the answer.

Q: What software is used to file the Annual Statutory ReportClick here for the answer.

Q: In a segregated cell captive, what effect is there on the rest of the captive if one cell goes insolvent? In other words, while the other cells are protected since they are independent of each other, how does the insolvency affect the sponsor company? Who assumes responsibility for the payment of claims after the company goes insolvent? Click here for the answer.

Q: I work for a P&C carrier and we are considering the purchase of a "rent-a-captive" domiciled in Bermuda for our home builder associations. We would then offer to provide services to various contractor associations (and their members), thereby giving them all the benefits of insuring with a captive without the administrative hassles. Is it possible, or even likely, that such an entity could be a revenue generating move for the carrier AND a benefit for the association members? Click here for the answer.

Q: How do hospital captives assist physicians with professional liability coverage? Click here for the answer.

Q: What is the best on shore domicile to establish a segregated cell captiveClick here for the answer.

Q: For captive management agreements, what specific service standards do you recommend should be included? (i.e. report preparation timeliness, turnaround time for emails & voice mails, processing of transactions, etc.) Click here for the answer.

Q: How much will a feasibility study cost -- high/low? Click here for the answer.

Q: An employer owned captive may insure employee benefits if a Prohibited Transaction Exemption is first obtained from the Department of Labor. Is a PTE required if the benefits are written through a rent-a-captive? Since the rent-a-captive is owned by a third party and the employer is not a party in interest, one would think a PTE would not be required. Click here for the answer.

Q: What benefits can a captive receive from the fronting carrier? In, turn what other types of commission can a fronting carrier get by ceding back to the captive? Click here for the answer.

Q: When a front policy is secured by a letter of credit how can stacking of letters of credit over several policy years be avoided? Click here for the answer.

Q: What is the value of using a front for a captive over a direct writing risk retention group? I assume there are tough credit standards from the fronting carrier. Under that assumption, why have a commercial insured as a partner rather than write direct? Click here for the answer.

Q: Is it possible to set up a captive with insurance agencies as the owners, to provide coverage for their own clients under this captive? What would be some questions to ask to start this process?

Other replies to this question:

Response #1: Hugh Rosenbaum (This is a full article on Agency Captives)
Response #2: Gary Osborne, USA Risk
Response #3: An anonymous Agency Captive Owner

Q: What are the advantages and disadvantages of Risk Retention Groups vs. Captives? Which one is usually a more cost effective alternative? Click here for the answer.

Q: With the rising cost of professional liability insurance (such as Directors & Officers Liability, Bankers Professional Liability, etc) are companies setting up captives for these types of coverages? Click here for the answer.

Q: How long does it take from start to finish to get a Risk Purchasing Group operational and writing liability policies? Click here for the answer.

Q: What is the role of the insurance agent in developing a captive for a client? Click here for the answer.

Q: We are forming a captive to insure our own entities. Our captive insures a widget company with around $40 mil in revenues and a new widget manufacturing company we are forming. We want to know if anyone writes "excess" and "umbrella" insurance for the captive without going through a fronting company? Click here for the answer.

Q: Could you tell us what year Vermont adopted the requirement for insurers to file a Statement of Actuarial Opinion on their reserves? Click here for the answer.

Q: What is a sponsored captive? Click here for the answer.

Q: Where can I find information on employee benefits in captives? Click here for the answer.

Q: Do captives/'off-shore' insurers 'fail' at a greater rate than domestic (say US) insurers? What is the percentage of insurers that will fail (incorporate and ultimately cease writing new premium) in: All US, Bermuda, Cayman, and Vermont? Could one argue that the savings device that captives employ is avoiding paying claims through insolvency? Click here for the answer.

Q: Is it possible to form an association captive or agency captive and sell both property and liability for home and auto without using a fronting company? Click here for the answer.

Q: Are captives rated? Is there any way for a lender to determine the claims paying ability of a Captive? Is there any way to determine a Captive's Policy-holder surplus? Click here for the answer.

Q: What does it take to form an "association captive" or some sort of entity that can sell employment practices liability insurance to employers generally? Is that possible? Click here for the answer.

Q: Can you provide further information regarding Regulation 114 trusts as an alternative to L.O.C.'s? Is Regulation 114 a Comerica Bank only account or an industry term? Any assistance you may provide would be greatly appreciated. Click here for the answer.

Q: What do I need to know at the outset to help a group of physicians in South Carolina (and eventually other states) set up a Captive or Rent-a-Captive? The goal is to allow Physicians to manage their insurance risks and reduce taxes. Click here for the answer.

Q: Please explain the difference between a Protected Cell Company (Segregated Accounts) and a Rent-a-Captive. Click here for the answer.