Single-parent captives may frighten some clients, while others may be too eager for them. A qualified agent’s job is to help clients evaluate whether they ought to truly consider a single-parent captive as a viable alternative.
Single-Parent Captives: Advantages
Single-parent or “pure” captives can offer unique and fully customized solutions. Clients that find significant value from pure captive ownership are generally looking to:
Save portions of their operating cash over time to pay for unexpected or “shock” losses.
Smooth the cost of retained risk over time through actuarial loss reserving methods.
Provide an alternative to off-balance-sheet funding.
Pass through insurance costs to their customers, utilizing the captive to support reimbursable expenses related to total insurance costs.
Lower the retained loss limit of their individual business units by offering “deductible buy-down” coverage through the captive.
Smooth costs at the business unit level by charging a “guaranteed cost” premium via the captive, rather than charging business units for self-insured losses as they occur.
Address situations where there is either a regulatory or a contractual requirement to demonstrate funding of certain retained liabilities.
Operate their captive as a profit center, by participating in insurance products sold to their customers or other business affiliates.
Improve their overall net worth by consolidating captive assets on their balance sheet.
Potential accelerated tax deduction by turning the loss fund into a tax deduction
The captive owner is in full control of all operational aspects, such as: lines of coverage, limits, service providers, and captive domicile location
Any surplus in the captive can be used to address the client’s immediate needs, such as: increasing captive retentions, insuring new lines of coverage, or reducing future premium requirements.
Single-Parent Captives: Challenges
Participation in any type of captive is a long-term undertaking. While many of the following issues would be encountered in any captive (in some shape or form), no single-parent captive discussion would be complete without mention of the possible drawbacks:
A captive, like any other investment, requires an internal commitment in order to be successful:
Setting up a captive involves initial start-up capital and start-up expenses.
The captive’s business plan must be put together and then approved by the selected captive domicile.
A captive has certain minimum annual operating costs.
If the loss experience is greater than expected, the captive may require additional funding.
The captive must be regularly monitored and evaluated by upper management.
The tax complexities associated with captive ownership should be thoroughly discussed and evaluated.
As a sole captive owner, the client will be 100% “on the hook” for all losses. There is no risk sharing as exists in a group captive.
Although the client does not bear the burden of another participant’s poor loss experience, the client also does not have the benefit of sharing its own large losses with others.
Captive solutions are becoming an integral part of the way we do business in today’s changing market. A pure captive complements rather than replaces the client’s current insurance program, by providing a funding mechanism for existing self-insured or retained risks.