Does your client have a good loss history?

Historical loss ratios are often not the best measure of a good loss history. A reasonable measure might be the average incurred losses over the last five years, divided by the estimated first dollar premium at renewal. If this ratio is 30-40%, it is probably a good candidate. Another test is to take the worst year of the previous five and compare it to the renewal premium. If this ratio is 80% or higher, your client might not be a good candidate for a captive. Loss estimates are complicated, and these two tests are not definitive, just general guidelines.

Is your client financially robust?

A captive program typically requires a greater level of funding during the first two policy years than a fixed-cost program. Many employers simply cannot afford to dedicate additional capital to an insurance program, even if it leads to lower ultimate costs. The ability to obtain a letter of credit from a bank can greatly reduce the cash outlay required to start a captive insurance program.

Additionally, profitable employers are more likely to invest in safety programs that continue or improve upon their historical loss trend.

Does your client have the willingness to learn the complexities of a captive insurance program?

The concept of a captive is straightforward, but the execution can be complicated. Employers need to feel “pain” in order to have a real interest in a captive. This pain is normally created by rapidly increasing premiums, a feeling of lack of control, or poor service. Typically, the line of coverage being considered has to be a large expense item before it becomes a significant issue to the employer.

If your client has had good loss experience, is it because of something specific they have done, or is it simply luck?

If an employer has simply been lucky, the reverse can also happen. If this occurs while in a captive insurance program, the employer may face dramatically higher insurance costs.

Does your client believe they are capable of controlling their costs?

Some employers simply believe they are along for the ride. These are not good candidates for a captive.

These questions are meant to only be general guidelines. To determine if a captive program is a viable option for your client, please contact us.