Captive owner Q&A: How to build your own captive

Andrew Koegel, the European chief underwriting officer at Toyota Insurance Management, explains what anyone considering setting up a captive should know from the outset

 

Launching a captive is an exciting time for any company and can transform how its risk exposure is managed.

But before going down this route, there are many things to know from the outset to help make this worthwhile. Andrew Koegel has more than 25 years’ experience in the insurance industry.

Having worked on a number of captive set-ups in his career, Captive Review sat down with the Toyota Insurance Management executive to find out what newcomers need to know.

Captive Review (CR): When deciding whether to start up a captive, what are some of the key benefits to remember?

Andrew Koegel (AK): With a captive, you are effectively setting up your own insurance company and this can bring with it several benefits. For instance, there is the potential to receive underwriting profits if it goes well and to access capital that is accrued.

Rather than being assumed by a third-party insurer, with a captive the company can access this directly and use it for reinvestment. Control over cashflows is also a benefit. You know exactly when a premium is being paid and there is no delay there.

Claims also have the potential to be processed quicker. There are also administrative benefits to be captured in terms of costs and efficiencies. Your captive will be a blank slate and, unlike using a traditional insurance company, there will not be any legacy issues to deal with. With a captive, coverage can also be structured in more specific and impactful ways.

This can range from standard coverage to other things that are not offered in the market. Something we see is some innovative companies use their captives to offer insurance products to their employees, which they cannot get in the wider market. In the current war for talent, this can help attract and retain talent.

Having a captive can also change how you approach and consider the topics of insurance and risk in general. This can help you pay more attention to mitigation and claims prevention. For instance, say you are covering property risks for your own factory. You might invest in more risk prevention in these factories rather than paying on the claims side.

A captive can also give you better access to reinsurance. You can be an insurer or reinsurer but in both directions with a captive you have direct access to the reinsurance market, allowing you the opportunity to negotiate better terms.

CR: From the outset, what are some of the most important considerations to keep in mind when starting up a captive?

AK: Before you start, it is crucial to answer a fundamental question that is also easy to overlook: do you really need a captive? For instance, does it make sense for your insurance needs?

This means stepping back and taking a good look at your programme and what need you have for coverage that a captive would be best-suited to provide.

It is imperative to do your homework and assess if it works for you. This means understanding and knowing your risk profile. Your risk profile is where you assess what risks you can afford to take on internally or do you continue to insure in the general market – almost all captives are selective in what they cover. How much risk do you want to take on?

It’s worth stressing that having a captive is a long-term commitment and this is not something done lightly. It is frankly too much work, money (binding investment capital) and effort if you only want a captive for a short amount of time. Therefore, conducting a feasibility study is important in helping you decide if it makes sense for you and your business.

CR: How has setting up a captive changed in recent years? Has the process become more efficient or are there additional steps to take?

AK: The most significant change is how the world of captives has grown over the years. There are now many different types to explore, with a spectrum of options to choose from – ranging from simple to complex. More options to choose from is, of course, a benefit, but this can also mean more challenging decisions to make.

Therefore, it is best to first decide what you want from your captive, then you can choose the right structure to complement this. If you go for a complex captive, there will of course be more effort to set up, while with a simple rent-a-captive structure, this will have already been set up and you just need to buy into it.

In general, there has been more growth in the captive market, so there is a greater range of choice as well as experts to liaise with. On the other side, which adds to the complexity, there are regulations. You’re effectively setting up an insurance company and insurance is a heavily regulated industry, meaning you have to take care of things that are constantly changing.

Data protection is a big one. Insurers hold a lot of data and have to follow various regulations to keep this safe, something which you become more exposed to when setting up a captive. Therefore, you have to be informed about these things and understand what is exactly going to be involved with all areas of setting up a captive.

The growth of the captive market is a double-edged sword – there are more resources to guide newcomers in the space, but in the same breadth it has become more complex (depending on the structure you go with). And the regulatory aspect is not likely to go away any time soon.

CR: In terms of potential pitfalls, what are some of the most common errors people make when starting up a captive? Are there any misconceptions you’d like to dispel?

AK: The administrative burden with rigorous reporting requirements, and often overlooked pitfalls like data protection, can be significant. This stems from the common pitfall of people not understanding the basics.

Again, this is about taking the time beforehand to do your research. If you are going to set up a captive, like anything, it is important to understand the fundamentals. Preparation is key, so know what you are setting up and why.

Abraham Lincoln famously once said: “Give me six hours to cut down a tree and I’ll spend the first four hours sharpening the axe.” It really helps if you know what you are doing. A benefit some people often pursue are the potential tax implications of using a captive.

Tax is very complicated and highly dictated by domicile choice, so it’s important to do a lot of homework around this specific issue and how it may impact the captive. Specialist advice could be sought in this area. At the end of the day, you may even realise it doesn’t make sense to launch a captive based on your own circumstances.

That can be a worthwhile conclusion if you’ve made a real effort in investigating this feasibility, and you could end up saving yourself considerable resources. Captives aren’t for everyone – it’s worth keeping that in mind.

CR: What would be your advice to anyone reading this who is interested in setting up a captive in 2024?

AK: Again, it comes back to doing research and understanding that setting up a captive is a long-term commitment with lasting repercussions. For 2024 in particular, it’s important to stay informed and know what regulatory developments could be launched in the coming months.

The top risks ranked by insurers right now are cyberattacks and the loss of data. This is only increasing in importance as a risk, so it is key to pay this the attention that it deserves – having the right technology to protect data is crucial.

I attended an insurtech event recently and going forward, it is clear we are going to see how we can use tech more intuitively in insurance. There is a lot of noise, and potentially some hype, around AI, but it is clear the use of technology is changing with the potential to revolutionise the insurance industry.

When thinking about technology, psychologist Abraham Maslow once said: “If the only tool you have is a hammer, it is tempting to treat everything like a nail.”

This highlights our tendency to over rely on particular tools. In that vein, setting up and using a captive for the first time may be an ideal opportunity to use other tools.

If you have a captive insurance company, you can use new technology in much more flexible ways as you are starting with a blank slate. This reinforces the advantage of using a captive as you aren’t held back by the (mostly technology-based) legacy issues often weighing down traditional insurers.

That is somewhere the captive industry continues to get better by embracing technological advancements. This will make captives increasingly useful as insurance solutions.

12 August 2024
5-6 November 2025

AM Best affirms ratings of Shell’s two Texas captives

Solen Versicherungen AG mostly writes offshore and onshore property and liability risks, as well as the associated business...
MORE

South Carolina approved 23 new captives in 2023

There were 221 captives domiciled in South Carolina at the end of last year, up from 208 at...
MORE

edHEALTH appoints new board member

Ben Hammond is chief financial and administrative officer from The Lawrenceville School in New Jersey   edHEALTH has...
MORE

Marsh Mangrove SPC licenced in Cayman

The segregated portfolio company was licenced by the Cayman Islands Monetary Authority in April as a Class B...
MORE