RSM: Implementing and maintaining a captive structure

Matthew Haymes and George Pavlis on the benefits of regular reviews of captive structures to ensure they meet current needs and objectives of organisations.


Captive insurance structures can provide a wide array of benefits to a breadth of distinct types of organisations, from not-for profit associations to multinational conglomerates.

While each organisation has its own objectives, risk profile and risk appetite, varying structures available in the market provide them the flexibility to implement a captive that aligns with their specific objectives and needs.

Once a captive structure is implemented, the licensing, operational dependencies and other market considerations may put barriers in place to prevent change in certain elements of the established structure.

This structural stickiness places a significant level of importance on the decisions made during the implementation of the captive structure to ensure the design effectively meets the specific needs and objectives of the organisation both today and on an ongoing basis.

When a captive is being established, significant analysis should be conducted to ensure the appropriate management structure, retained lines of business, insurance partners, risk retention, and so on, are selected to maximise the long-term value and sustainability of the captive structure to the overall organisation.

Ideally, the initial structure will be developed with a long-term view in mind and remain suitable under varying future organisational needs and changing market forces to minimise the adjustments needed to the captive structure.

That said, while general organisational stickiness places hindrances on changing certain captive elements, established captive structures should be revisited on a regular basis to ensure they remain ideal for current organisational needs and consider changing market forces.

These regular reviews will ensure the organisation maximises the value of its captive structure on an ongoing basis.

Organisational benefits

Captives can be used to provide the following benefits, among a variety of others: Recapturing insurance profits: Implementing a captive insurance structure formalises an organisation’s risk financing mechanism and subjects the organisation to retaining insurance risks and future insurance claims.

Insuring the business internally provides an opportunity to recapture projected profits built into the insurance premiums charged by third-party insurers.

Once these profits are recaptured, the organisation gains the flexibility to adjust the projected profitability of the captive to meet its organisational objectives.

By recapturing insurance profits and building up capital in the captive over time, opportunities arise for more strategic use of the captive through reduced premium rates and overall insurance costs, stabilised insurance costs year over year, as well as the expansion of underwriting capabilities of the captive to insure more lines of business and reduce reliance on the commercial market.

Additional control over insurance coverages and operations: The captive structure gives organisations the ability to tailor the insurance coverage and policies to meet their specific needs.

This provides an opportunity to reduce the amount of policy exclusions, insure additional coverages not readily available in the market, and design a mechanism to insure risks that would not normally be commercially insured across the larger organisation.

Furthermore, taking increased control over the insurance programme provides a variety of operational benefits including an increased control over claims management, reducing the need for negotiations and providing increased control over the claim reimbursement process and timeliness of claim payments.

Opportunities for enhanced risk management structures: Captive structures allow organisations to centralise insurable risks within the captive.

For larger multi-entity organisations, this allows risks to be amalgamated at an organisational level which could provide significant risk diversification benefits and may lead to a reduction in the financial impact to the organisation.

This is especially true for losses that would be significant for an individual entity within the organisation but not as significant to the larger organisation.

The centralised management of these risks across the larger organisation results in improved risk-management processes, as well as an improved understanding of those risks from increased access to data stored within the captive and across the organisation.

Access to global reinsurance markets: Captive structures provide organisations access to global reinsurance markets not accessible to non-insurance entities.

This provides a captive with the opportunity to set its risk retention at limits that meet their risk appetite and provides more competitive insurance pricing due to access to the larger global market beyond an organisation’s local borders.

Organisational fit

Captive structures can be used by almost any organisation if certain requirements are met. From large organisations consisting of a variety of portfolio companies, not for-profits looking to stabilise insurance costs or associations looking to expand their membership value, captives provide a wide breadth of organisational benefits.

The following elements should be analysed and deemed to align with organisational needs/objectives before determining if a captive structure would be appropriate for your organisation.

Risk appetite: In the simplest terms, under a captive structure, organisations will take on risks which, in many cases, were previously transferred to third parties.

To unlock the benefits of a captive structure, an organisation must have a strong understanding of its own risk appetite and design the captive structure to fall within this appetite.

A formal review of an organisation’s willingness to retain this additional risk should take place and ensure it is aligned with its overall risk management framework.

The flexibility within different captive structures allow entities to strategically design a structure that aligns with its own specific needs, and a clear well-understood risk appetite is generally the first step to implementing and managing a captive structure.

Risks insured by the captive: Once the risk appetite is formalised and understood, a thorough review of the risks should be completed to determine which risks would be appropriate to be retained by the captive.

This analysis is generally centered around an actuarial captive feasibility study which will focus on the volatility and expected future losses for any identified insurance risks that may be retained by the captive.

This study can also be used to identify potential emerging or future risks included in the insurance business that may impact future sustainability of the captive.

During this process, it is beneficial for the organisation to complete a thorough risk review and identify all risks, either currently insured or not and retained by the organisation, which could benefit from being retained through the captive.

This will help to ensure the organisation takes full advantage of their new captive structure and will allow for increased risk diversification.

Captive risk retention: Mechanisms exist to limit a captive’s exposure for any single policy year either through per-claim limits, aggregate limits and/or reinsurance protection.

As an insurance entity, a captive may purchase reinsurance coverage that places limits on the total amount of claims that the captive will pay before an external reinsurer becomes responsible for paying claims.

Implementing policy limits (per-claim and/or aggregate) will limit the captive’s exposure and push the risk back to the insured entity in the organisation above certain claim amounts or alternatively, the entity may purchase commercial insurance for risks exceeding the captive’s limits.

Other key considerations: There are numerous considerations to establishing a captive that should be addressed while investigating whether a captive is appropriate for your organisation. These include:

  • Capital costs for the captive and the need for initial/future capital injections to fund the captive business. The level of capital needed will depend on a variety of factors including the jurisdiction chosen for the captive business, the business insured by the captive, the size of the business, the risk limits, etc.
  • The captives fit with organisational needs, culture and strategies. If the organisation expects to sell certain portions of the business in the future, there are additional capital structures that allow for segmentation of the business to help simplify the process.
  • Tax implications, which will depend heavily on the specific organisation.
  • Implementation costs compared to the potential benefits outlined above.
  • Captive jurisdiction and licensing, which will impact a number of the above items and should be determined to align with organisational objectives.
  • Organisational structure, including whether the captive will be managed internally or through a third party.

Ongoing sustainability and management

Whether investigating a new captive structure or reviewing an established captive, the following questions should be investigated to ensure the continued appropriateness and effectiveness of the captive structure for the organisation:

  • How do recent global industry changes and emerging trends impact the captive’s sustainability?
  • Do the selected insured risks meet our organisational needs and are there new emerging risks inherent within the organisation that fall within the captive’s risk appetite and would benefit from being insured by the captive?
  • Do the insured risks remain within the risk appetite of the organisation?
  • Does the structure align with our cultural and organisational goals?
  • Are we effectively using the data collected through the captive structure to inform organisational decisions?
  • Do our third-party relationships and agreements still support our business?
  • Does the chosen captive structure remain appropriate considering regulatory changes?
  • What opportunities exist for the captive to further support the organisation?
  • What competitive advantage can be gained using the captive to unlock value for the organisation?

The benefits that may be unlocked from the regular review and effectively using the captive structure should far exceed the cost of these reviews.

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