Is a Captive Right For Your Organization?

Utilizing a captive is often considered the highest form of self-insurance, but is it right for your entity? There are many reasons for a public entity to consider forming a captive, and just as many reasons not to form one. This session walked through the evaluation process and provided practical knowledge on how to analyze whether forming a captive is a good fit.

This PRIMA 2016 session was presented by Victoria Nolan, Risk and Benefits Manager, Clean Water Services.

A captive is a formalized self‐insurance program that operates as an insurance company to its parent, collecting premiums and paying claims, commonly through reimbursements of claim cost to the parent. It is a funding mechanism for an organization’s retained losses and operates within the insurance regulations of the domicile where it is located.

Why would you consider a captive?

Financial Benefits

• Pure financial benefits are minimal but public entities do not pay federal and states income taxes
• Premium savings are not significant drivers but may be enough to cover cost of captive
• Relate more to earnings potential, fund reserves and potential for mitigation funding

Some Operational Benefits (Most benefits are operational)

• A formalized, disciplined approach to self-insurance where trend analysis, loss prevention and claims management controls can be applied
• Ability to segregate funds in a regulated insurance entity over time to fund losses incurred
• Formalized means to ensure adequate funds are available to uninsurable losses

The use of captives by public entities is not the most common solution. However, some entities have found them useful, such as entities with larger self-insureds programs or those with limited access to self-insured pools. Captives can also be useful to those where retaining claims management is a significant issue or if commercial insurance is inadequate or unaffordable.

Factors to Consider:

In determining if a captive solution is appropriate for your organization:

• Examine your claims history – at least 10 years back
• Examine your risk management history/loss prevention effectiveness
• Determine your organization’s risk appetite at all levels
• Conduct a feasibility study – good to use a consultant
• Gather enough data – losses, insurances schedules, capital, actuarial data, etc.
• Select your domicile – make sure they allow public entity owners
• Determine a go/no go, looking at costs, resources and discipline
• Get buy-in – get board together and have a work session
• Start approval process – need resolution to create insurance entity
• After approval, formation occurs – name, structure, captive manager service providers, etc.