Captive Insurance Company and other Risk Financing Strategy

Tap into deep totally objective expertise to assist you with professional reviews of your optimum risk financing strategy.

Organisations will always benefit from objective reviews of their overall risk financing strategy and total cost of risk. Often blinded by the annual insurance market offerings, it is all too easy to overlook better long-term risk financing options, that take all costs and benefits into consideration and offer more robust and self-determined positions that provide a measure of insulation from the vagaries of the insurance markets.

Typically when looking at an organisation’s exposures we identify:

  1. What risks they can safely retain without losing financial stability;
  2. What risk financing mechanisms are available to them in respect of these risks (conventional insurance, self-insurance, captive, insurer pooling arrangement, internal mutual etc);
  3. What risks should be transferred normally by insurance;
  4. The ideal risk financing approach, taking into account all the financial effects of each option (premiums, claims, brokerage, admin expenses, taxes, investment income, cash flow, capital commitment etc). NB, it is possible that if conventional insurance is cheap enough, this might still be the best way to finance risk that can be safely retained.

Generally speaking, risk retention works best with organisations that have large volumes of individually small exposure units that generate high frequency, low severity losses (employees, vehicles, shipments, small properties etc), and is often very effective for affinity groups that have the ability to assemble pools of homogeneous risks from large numbers of small organisations.

It is usually best to conventionally insure individually large exposures that generate low frequency, high severity (or catastrophe) losses (factories, aircraft etc), although some organisations might benefit from contingent capital or other “alternative risk financing mechanisms”.

Services in this area usually take the form of feasibility analyses, and in addition to RACSAP you will usually require third party advice from local specialists (actuaries, lawyers and tax advisers).

With regard to Captive Insurance Companies, RACSAP can consult on their feasibility, domicile and establishment and continuing management, as well as the risk financing arrangements that support them. For example:

  1. Determining the detailed parameters of the arrangements in question (e.g. how much premium should a captive charge, what reinsurance does it need and how should this be sourced, how much capital does it need, where should it be domiciled, etc.)
  2. Establishing the legal documentation and regulatory and practical infrastructure to implement a. above
  3. Creating “dashboard” reporting mechanisms to allow the financial effects mentioned above to be accurately measured, as close to real time as possible. KPIs and attendant alerts are a key element of this process so that an organisation can respond quickly to unexpected developments (e.g. particularly high or low premium or claims levels, credit control slippage, high or low capital ratios etc.)
  4. Creating the systems, internal controls, accounting and administration processes to enable the Captive to operate efficiently, accurately and effectively
  5. Periodic ultimate loss estimation (often working in conjunction with consulting actuaries)
  6. Participating in the continuing management of the arrangements in question, including amendments to them if circumstances change
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