Captive Formation Process

Feasibility Study Step 1 - Feasibility Study (estimated cost $5,000 - $10,000)

Purpose: To determine if a captive makes financial sense for your situation.
Feasibility Study should:

  • Define Objectives
    • Financial
    • Business
      • identify potential risks of the captive (loss history)
      • analyze the financial effects of the captive on its owners
      • discuss the cash flow/tax benefits
      • domicile analysis
  • Develop Program and Ownership Structure of Captive

Agree whether the proposed captive is a “go” or “no go” proposition.
If a Captive makes financial sense proceed to Step 2

Actuarial Study Step2 - Actuarial Study (estimated cost $6,000 - $10,000)

An actuarial firm provides actuarial models that include suggested retention limits and the loss pick which is calculated from the prior 5 years loss experience.

Select Service Providers Step 3 - Select Service Providers

Identify and begin dialogue with qualified underwriting partners. Selection of a competent team is one of the most important parts of the captive formation process and can determine its success or failure.

Third party administrator (TPA)
Legal Council
Actuary
Auditor
Accountant
Captive Management

Meet Insurance Commissioner Step 4 - Meet Insurance Commissioner/Regulators

Most domiciles require some sort of interview with the regulators in the chosen domicile before the application is granted.

Insurance Application Step 5- Insurance Application (estimated cost $5,000 - $10,000)

Complete and file captive’s license application with chosen domicile’s insurance department/regulators/finance ministry for approval.

The application generally requires:

  • Personal information about the company's shareholders, directors, and officers
  • Information about the company to be formed
  • Business Plan describing how the company will conduct the business of insurance for which it seeks licensure including:
    • Structure of Governance
    • Management
    • Service Providers
    • Capital Requirements
    • Investment Policies
    • Pro Forma Captive Financial Statements
    • Design and Purpose of the Captive
    • Coverage and Limits
    • Insureds
    • Fronting Requirements
    • Reinsurance Requirements
    • Risk Management and Claims Practices
    • Economic Impact Statement
    • Fees
Captive formation Step 6 - Formation and Incorporation (estimated cost $10,000 - $12,000)

When the insurance application is approved by the Insurance Commissioner, a Statement of Authority is issued that allows the formation of the captive insurance company.

The Statement of Authority is taken to the Secretary of State or Financial Services office and a Certificate of Incorporation that forms the captive is issued.

Captive Capitalization Step 7 - Capitalization

The captive is capitalized by depositing cash into a bank account in the name of the captive or filing a letter of credit. The capitalization is set by the domocile and the actuary, and typically ranges from $100,000 to $1,000,000. This will vary depending on the size of the captive, the number of coverages in the captive and the amount of risk assumed by the captive.

Captive Licensing Step 8 - Licensing

Upon proof of the Certificate of Incorporation (step 6) and capitalization (step 7), the Commissioner then issues the insurance license to the captive. The captive is now legally operational.

Ongoing Captive Management Step 9- Ongoing Captive Management (estimated cost $20,000 - $100,000 or more)

Contract with a captive management company for ongoing management services. This will vary depending on the size of the captive, the number of coverages in the captive, and the scope of services.

The captive manager insures that the captive stays in compliance with the terms of its license and meets all regulatory requirements and deadlines.