United States: It's Time For A Captive Check-Up

A lot of work goes into forming a captive. It may take prospective captive owners several years to get all of the internal stakeholders behind the idea of forming a captive. It may then take upwards of a year to execute the final design and implementation of the captive program. One couldn't blame the company risk manager or CFO if they decide to take a break from getting into the details of their newly formed captive and entrust the ongoing operations to the captive manager or program manager. While there is nothing wrong with letting the captive manager and service providers some time to execute the plan of operation, captive owners should mark their calendar for a comprehensive health check-up two or three years down the road.

By the end of year three, the captive owner can really put to the test many of the assumptions made in the initial feasibility plan. Since captives typically write only a few policies every year, and some policies may not have any claims in any given year, it usually takes a few years to shake out how likely the projections match with real-world losses.

If the feasibility study assumptions weren't tight enough, meaning the captive is losing more money than was anticipated, most owners or CFOs would readily understand long before the third anniversary that their captive needs some attention. However, if the captive is doing better than expected, the CFO or owner may be tempted to leave 'good enough' alone and not get involved. The problem is that an insurance company doing better than projected faces its own set of risks and concerns. An owner could be missing an opportunity to place additional risk in the captive or a captive could be jeopardizing its own status as an insurance company if it were later determined that premiums were set too high for the risks insured. If three or even five years go by and the captive is greatly exceeding the projections made in the feasibility study, a thorough check-up is in order.

What goes into a check-up?

A good place to start is with the captive's initial feasibility study and to compare it with real-world data. Work with your captive manager to develop questions for your actuary to see what data can better inform future models. Next, the captive should make sure that its service providers are doing a hard look at the coverages, limits, and rates and see if they meet the captive owner's needs or if there are new risks that can or should be added to the captive.

A captive's feasibility study also likely made a number of assumptions about how the captive should be structured to meet the needs of the insured and to maintain regulatory compliance. In a three year span of time: regulations change and ongoing court decisions can alter the captive landscape. This is a good time for a captive to engage its captive manager, attorney, and actuary to review industry changes and trends and make new recommendations going forward.

A good captive check-up also should involve a review of the captive's service providers. Evaluate the costs, experience level, and quality of service offered by your actuary, accountant, attorney, captive manager, investment adviser, and others.

This is also a good time for the captive's governing board to do a self-evaluation. Review the experience and insights that each member brings to the boardroom. Would the captive benefit from an independent board member unaffiliated with the parent company or a service provider? Should the board invest in captive insurance-specific training opportunities for one or more board members? Is there a succession plan in place for current board members from the parent company or elsewhere?

Why do a check-up?

Many of these steps can and should be done with little or no additional cost. These are the types of questions that a captive should be asking its service providers that are already being compensated. More importantly, these types of questions are ones that any insurance company, captive or traditional, should always be asking itself. The difference with a captive insurance company is that its smaller size means that important trends can take longer to develop. Captive owners, especially owners that do not have an insurance background, often need to make the extra effort to distinguish between how an insurance company works versus any other typical business operating unit.

Engaging in this type of check-up is a strong indicator to outside spectators, be that state or federal regulators, reinsurers, pool managers, or rating agencies, that the captive has strong and stable corporate governance. Scheduling a check-up in the third year can help a captive become better prepared for its regulatory examination. Identifying and correcting any issues before the examiner starts the examination can make the process go more smoothly and performed at a lower cost.

Most importantly, a thorough check-up can ensure that the captive is most efficiently meeting the insurance and risk management needs of its insured/owner.

Planning ahead for the next check-up

As part of the check-up, a captive should also map out both quantitative projections for the coming five to seven years as well as a long-range plan for any new coverages or modifications to existing coverages to consider in the coming years. These plans can be used to guide the captive board's strategic planning over the next few years and then ultimately serve as a benchmark for the next captive check-up in roughly five years. By planning to have a check-up a year or two ahead of the captive's regulatory examination, the captive stays on a regular schedule to spot and correct concerns before they get out of hand.

Planning for a check-out

A dissolution plan is also an attribute of good corporate governance, even if a captive is healthy and growing. There are many reasons why a captive may need to be shut down in the future. The needs of the parent company may change, such as when the parent company is sold. Whatever the reason, there may come a time when it is best to run off and shut down a captive. Some captive owners who decide to shut down a captive are quite surprised that the run off process for a captive can be measured in years, not weeks. Captives with risk pool liabilities, long developing claims, or occurrence policies are especially vulnerable to multi-year runoffs.

One way to avoid exceptionally long run-offs is to make a practice of buying a loss portfolio transfer (LPTs) for liabilities that linger for longer than a set period of time. While one-time LPTs or reinsurance agreements executed on an expedited basis can be quite expensive, the captive manager and reinsurance intermediary can often negotiate much more favorable rates for a series of transactions. Getting old residual liabilities off the captive's books allow the captive to more accurately and quickly book underwriting profits. Should it be necessary for a captive to go into runoff, the captive then has a finite set of risk exposures that can more efficiently be dealt with.

It is important that the captive board and captive owner have regular discussions with the captive manager and other service providers to understand what the process for a dormancy, run-off or dissolution would be based on the captive's current operations regardless of the current status of the company. Having a dissolution plan also serves as a check on keeping the captive from growing so complex that an orderly wind-down becomes impossible.

Active involvement of the captive owner and board

Even if a typical captive board meeting consists of a mostly one-way flow of information from the service providers to the board members, the check-up and check-out discussions are ones that all members of the board should actively participate. These discussions are the best times for board members to switch to an active role and exercise their authority and provide strategic direction for the company. By scheduling a regular check-up and keeping an eye on the dissolution process, board members will meet many of their fiduciary responsibilities to the captive and owner, their regulatory responsibilities to their domicile, and their contractual obligations to their business partners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions