1 Captive 101
Overview
August 2024
Proprietary & Confidential
© 2024 Alliant Insurance Services, Inc. All rights reserved.
Overview
2 ✓ What is a captive; benefits, risks and use
✓ Types of captives
✓ Captive Implementation – feasibility study, domicile selection ✓ Timeline
✓ Costs and Fees
✓ Captive Team
✓ Q&A
Captives are special purpose insurance or reinsurance
companies.
Captives insure, reinsure and cover the risks of their
owners and affiliates
A formal approach to projecting and funding for loss
and exposure.
3 WHAT IS A CAPTIVE?
Goals Of Captive Participation
4 Manage
Insurance
Costs
Control Risk
Underwriting
and
Investment
Income
Advantages of a Captive
5 ✓ Own and manage a portion of your insurance risk
✓ Share in potential underwriting profits and investment income on your insurance premium
✓ Control risk management and claims
✓ Stabilize premium rates
✓ Direct access to reinsurance markets
✓ Reduce dependence on commercial insurance markets
✓ Gain purchasing power for the participating entities
Advantages of a Captive: Public Entity Pools
6 ✓ Enhanced investment opportunities
✓ Retention of captive surplus to control volatility
✓ Leverage in excess/reinsurance placements via more participation ✓ Segregation of financials statement specific to captive
7 Business Risks of a
Captive
Potential loss of underwriting profits and
investment income
Potential loss of investment/collateral funding
Sharing risk among participating members
Long term commitment
Frictional cost & upfront capital investment
8 Use of a Captive
❑ Placement of controllable frequency layer of
risk
❑ Deductible Reimbursement
❑ Fill coverage gaps in insurance program
❑ Financing risks that cannot be placed in the
traditional insurance market
❑ Optimizing capital deployment for risk
financing
Captive Can Participate in Risk on
Various Lines of Coverage
9 CAPTIVE
PARTICIPATION
Workers’
Compensation
Management
Liability
Cyber
Excess or Deductible
Reimbursement
General
Liability
Auto/Commercial
Vehicle
Terrorism
Employee
Benefits
Windstorm, EQ
and Flood
Pollution
Types of Captives
10 Single Parent Captive Group Captive
A captive insurance company with one
corporate owner, insuring only the risks of
the parent organization or its subsidiaries.
Also called a pure captive.
Plus “Brother-Sister” captive with a
single-parent
A group of non-related
organizations that finance
risk through a group pool.
SINGLE PARENT OR GROUP CAPTIVE
OWN OR RENT?
11 Own Your Captive
Single Parent Captive
A captive owner
funds the formation
expenses, capital
and surplus.
Group Captive
Captive participants
collectively fund the
formation expenses,
capital and surplus.
Rent-A-Captive
An arrangement in which a
captive participant “rents”
the facilities of an outside
organization. This provides
the benefits of a captive
without the start up costs.
$$$
RENT-A-CAPTIVE
12 ▪ The cell facility owner creates and capitalizes the core facility and rents its capital and insurance
license to cell participants.
▪ Built around the core company, each cell essentially
functions as its own captive for its participant.
▪ Each cell insures a different risk/participant and its assets and liabilities are legally segregated.
▪ Keeping It Simple:
▪ Speed to market.
▪ Faster regulatory process.
▪ Minimal start up costs.
▪ No separate capitalization requirement for each
cell.
Cell
Facility
Owner
Cell 6
CIRA
JPA
Pool
Cell 5
Cell 4
Cell 2
Cell 3
CIRA CAPTIVE CONCEPTUAL APPROACH
13 Public
Entity 2
CIRA JPA Pool Captive
CIRA JPA
Captive Owner
Public
Entity 4
Public
Entity 1
Public
Entity 5
Public
Entity 3
Premium Insurance
Policies
Reinsurance Premium
Claims Payments
Capital/Collateral
Underwriting
Profit
&
Investment
Income
Captive Feasibility Study
14 • Data Analysis
• Loss Estimates
• Capitalization Requirements
• Domicile
• Fees
• Coverages, Retentions, Limits
• Expenses
• Reinsurance Costs
• Regulatory Issues
• Pro forma Financials
Captive Domicile Selection
15 Other factors
• Capital/surplus requirements
• Operating costs
• Political stability
• Infrastructure
• Domicile meeting requirements
• Local director requirements
• Operating costs
• Ease of travel
• Perception, particularly for nonprofits
• Availability of home state as a domicile
• Unique characteristics of the domicile
Driving factors
• Structure/Coverage Needs
• Regulatory environment; history
• Tax considerations
Captive Domicile Rankings
16 TOP US CAPTIVE DOMICILES 2023
1. Vermont: 659
2. Utah: 439
3. North Carolina: 311
4. Delaware: 289
5. Hawaii: 263
6. South Carolina: 221
7. Arizona: 176
8. Tennessee: 162
9. District of Columbia: 120
10. Montana: 100
11. Nevada: 100
TOP NORTH AMERICAN OFFSHORE CAPTIVE DOMICILES 2023
1. Bermuda 670
2. Cayman Islands 661
3. Barbados 253
*Source: Business Insurance Survey, Business Insurance, April 2024.
Captive Expense
17 ✓ Start-Up
✓ Ongoing
*Projected Capital at 4:1 Ratio
Projected Combined Premium = $22,885,110/4 =
$5,721,278 (Projected Initial Capital Funding)
Illustration of Projected Start-Up and Ongoing Operating Expenses Owned Single Parent Captive Rent-A-Captive (VT)
Minimum one time capital
and surplus funding $250,000 $0
Feasibility Study $45,000 $30,000
Application Processing
Fees
$20,000 $10,000
Legal Fees $10,000-$20,000 $5,000
Application Fee $2,000-$10,000. Varies by domicile $2,000 ESTIMATED TOTAL $327,000-$345,000 $47,000
Owned Single Parent Captive VT RAC
Domicile Management $60,000 $50,000
UW and Ops Consulting $50,000 $45,000
Actuary $18,000 $15,000
Annual Audit $25,000 $15,000
Annual Domicile Tax
Flat Fee or % of Premium with
minimum tax
0.214 % Premium
Claims Administration TBD TBD
Reinsurance $0 $0
Carrier Fronting Fee $0 $0
Brokerage TBD TBD
Misc (Bank Fees/Travel) $10,000 $10,000
Premium to Capital Ratio 4 to 1* TBD - Regulator Review Start Up Expenses
Ongoing Direct Operating Costs
Captive Formation Timeline
18 ▪ Single Parent - 3-6 Months
▪ Rent-A-Captive - 1-2 Months
Captive Service Team
19 ▪ Insurance/Captive Manager
▪ Insurance Broker/Consultant - Alliant
▪ Legal Advisor (w/Captive experience)
▪ Claims Administrator
▪ Actuary
▪ Auditor
▪ Bank/Investment Advisor
20 Investment Income
Your captive program earns investment
income net of losses and expenses
Losses are paid out over several years
While the captive is waiting to pay losses, the
captive earns investment income.
The More Rewarding
Way to Manage Risk
Proprietary & Confidential
© 2024 Alliant Insurance Services, Inc. All rights reserved.