How to Form a Captive Insurance Company – A Step-by-Step Guide from Charles Spinelli

Big and fast-growing companies with multi-sided business activities understand the significance of having more control over their unique risk management plans. Formation of a captive insurance has become a powerful solution for them, not only to manage risk control but to save ample on premium that contributes to their profitability, in the opinion of Charles Spinelli.

A captive insurance is a form of insurance entity created and wholly owned by one or multiple businesses together to insure the risks of its owner(s). The model comes with multiple benefits, from customized coverage to higher control over risk management, tax benefits, alongside the scope of covering hard-to-insure risks attuned with advanced market trends.

Step 1: Evaluate the Necessity for a Captive

To begin, the foremost step is a feasibility study to determine if it is the right resort for the company. Forming captives makes sense for companies that consistently have claims, trouble obtaining insurance coverage, or pay considerable premiums. On the other hand, it needs a huge investment, formation of a standalone business entity with needed infrastructure, trained manpower, and more. The feasibility study gives an idea as to whether the positive aspects of a captive will offset the cost involved and help it reach its basic objectives.

Step 2: Select the Right Type of Captive

There are different types of captive insurance companies, such as single-parent captives, group captives, and rent-a-captives. The choice should be made based on the business’s structure, financial strength, risk profile, and needs. For bigger houses with significant risks, single-parent captives are the best choice, while group captives suit a group of industries with similar kinds of business risks.

Step 3: Select a Domicile

The domicile of a captive means the place where the business will be licensed. Domiciles may be domestic (in the U.S.) or offshore (in places like Bermuda, Cayman, Guernsey). Each domicile will have different regulatory requirements, tax implications, and capitalization (or collateralization) requirements. This decision should be guided by legal and financial advisers who have experience with captive formation.

Step 4: Engage Professional Advisors

According to Charles Spinelli, establishing a captive insurance company requires dealing with intricate legal, administrative, and regulatory stipulations. It is important to use a team of experts comprising attorneys, actuaries, accountants, and captive managers. These experts will facilitate the creation process, ensure compliance matters, and assist with structuring the firm to maximize performance.

Step 5: Capitalize the Captive

To get the licensure, all domiciles require businesses to meet the minimum capital and surplus as set by them. The minimum capital and surplus will vary based on the type of risks the captive intends to insure. The business must provide adequate initial capital, which may be in the form of cash, letters of credit, or other assets, to ensure that the captive can operate while fulfilling the obligatory aspects and unforeseen losses if necessary.

Step 6: Create and File the Business Plan

A comprehensive business plan is required for licensing, including ownership, finances, risk management, reinsurance, and governance. This is to be filed with the regulatory authority of the domicile chosen.

Step 7: Obtain Regulatory Approval

The regulators will review the application and typically conduct interviews and background checks. The captive will be issued its operating license if the regulators approve the captive and its application.

Step 8: Operate and Monitor the Captive

After the captive is licensed by the appropriate regulatory body, it must continue to remain compliant through ongoing financial reporting, audits, actuarial reviews, and by maintaining reserves. Regular monitoring ensures the captive continues to serve the needs of its parent company.

Establishing a captive insurance company is a strategic move that can provide significant long-term advantages. With proper planning and assistance, a captive can be a worthwhile addition to a company’s overall risk management strategy.