If you had Spring (or someone almost as good) perform a captive feasibility study for you today, would you end up with the same captive you have now? Would it write the same business? Be in the same domicile? Sometimes it helps to ask the question, “If I could start from scratch, what would this look like?”
I’m not saying scrap what you have and start over. More saying, what if you could look at all your insurance and self-insurance programs, all other areas with financial risk, and evaluate again the benefit of having them in or out of your captive program. Would there be a different mix or a different way to leverage your buying power (integrated or share limits of reinsurance behind the captive)? Would there be other programs which now fits a master strategy, such as group life insurance or international coverages? Would the domicile choice be the same? Does it make more sense to redomesticate your captive in the wake of recent developments? A lot to think about. We would need to answer this question: is there a good potential that we could make more money or save more money by doing a completely new captive feasibility study?
If you captive is more than five years old, consider some of the changes that would impact your feasibility study today:
The Dodd Frank Act changed the landscape for a lot of captives. Rather than incur a self procurement tax for risk out of state, some owners are redomesticating their captive back to home states to lessen the chance and amount of potential tax due. We now have, frankly I have lost count, over 30 state domiciles in the US, and countless off-shore opportunities. You’re pretty sure you are in the right spot, but a “refeasibilty” might show you otherwise. Some assets held in the captive may avoid other state taxes, so depending on what you are using for collateral, states need to be studied for the best match.
Ten years ago there were pretty much only large P&C captives writing pretty much only property, general liability and workers compensation, and occasionally a rouge auto or warranty program. We stuck to high deductible programs and some small quota share coverages to fill out a line slip.
Today, you can write almost anything that is an insurable risk and makes good business sense. You still can’t write tidal wave coverage in Oklahoma City (no kidding, it’s been tried), but we see more creativity and things that just make sense. I had heard that one snowmobile company sold money back guarantees if 24” of snow did not fall in December, then sent their captive out and placed snowfall index swaps to cover the risk — and made money.
Contingent business interruption is sometimes an uninsurable or underinsured risk, and a good candidate for the captive. Some use their captive to front their global or international property program, selling off pieces out the back and taking a nice fronting commission for themselves: the market would have gotten this if they didn’t.
Now we have benefit programs that are really taking off as captive programs. Prefunding retiree medical, group term life, stop-loss coverage, foreign coverage are just a few of the programs that make sense to add to the captive portfolio. And with some of these program, the premiums qualify as third-party business and may boost your captive returns with a positive tax affect. If you take the general consensus that about 35% of P&C risks are self-insured or insured into a company’s captive, and compare that with about 5% of Life and Benefit risk, the gap is 30% and in the billions of dollars of premium.
I think Karin Landry made up this word but it really makes sense in this context. It means looking at your captive anew, with a new set of eyes, in the new reality of this market place and environment. If you have not looked at the overall strategy and long-term use of your captive in over five years, perhaps now is the time.
If you did a captive feasibility study today for your company, would you end up with the exact same captive, with the same coverages, in the same domicile? A good question.
Image credit: Ivy Dawned via flickr