Is a Captive Run Like an Insurance Company?

Contributed by ICCIE Board Member, Ben Whitehouse of Butler, Snow LLP

One of the most common admonitions given to prospective and current captive owners is that a captive must be run like an insurance company. I’m still not exactly sure what that means in the context of a captive in the sense that many attributes of a successful and well-run captive bear little resemblance to a large traditional insurance company. There is one attribute of running like an insurance company, however, that I think many captives do fall short on. That is, taking a hard, sober look at the many assumptions made in the initial feasibility study after three to five years, and every few years thereafter, and readjusting the captive’s priorities based on those assumptions. It is quite natural, when any business operating unit does better than projected, to not look the gift horse too closely in the mouth.

A large traditional insurance company has the luxury of reams of claims data that it can use to regularly reevaluate its assumptions, capital reserves, and pricing.  A typical captive doesn’t have nearly as much data, and so this reevaluation of assumptions can’t usually happen on a monthly or even a yearly basis. However, once a captive is in operation for three to five years, and every three to five-year period after that, a thorough review is absolutely appropriate and necessary. Developing and sticking to a three to five-year schedule of updating the actuarial, accounting, investments, reinsurance strategy and legal review of every captive’s policies, business plan, rates, and structure will ensure an affirmative answer to the question: Is it run like an insurance company?