Captive Insurance

Modernizing captives improves risk management, lowers costs, increases efficiencies, and improves data quality and management

What is a captive

A “captive” is an insurance company created to insure the risks of its owner(s). Captives are a form of self-insurance established to meet the risk management needs of the owners or members. Group captives or risk retention groups insure the risks of unrelated entities.

Captives are formed to cover a wide range of risks, including most casualty exposure, property, terrorism, cyber, and even international employee benefits. Risks can be first party or third party, and companies are becoming more creative in how they utilize their captive programs.

The types of entities forming captives include the vast majority of Fortune 500 companies, all the way down to nonprofit organizations. Captive utilization spans most market sectors including automotive, telecoms, technology, retail, manufacturing, healthcare, pharma, oil and gas and even TNCs.

The benefits of forming a captive include flexibility for tailored coverage (hard to insure or emerging risks), insulation to the insurance market cycle, financial incentives in loss control, niche business risk knowledge, flexibility in managing risk, creative insurance solutions, cost allocations to business units, and consolidation of risk management.

Once established, the captive operates like a commercial insurance company and is subject to state regulatory requirements (albeit less onerous ones than the traditional market), including financial reporting, capital/ solvency support, and reserve adequacy including an annual actuarial opinion.

At the outset of 2020, risk professionals who were trying to purchase or renew insurance policies had to navigate an increasingly hardening insurance market characterized by higher rates in almost all lines. The coronavirus pandemic and natural catastrophe losses have only made matters worse.

COVID-19 and captive insurance

Captive insurance companies came into existence because of difficult markets, like what we’re experiencing right now. They offer companies greater flexibility and options in a hard insurance market.

Captives have helped support parents during the COVID-19 crisis by providing them needed cash through dividends. In addition, domiciles have supported some captives entering into intercompany investments as another way to get capital to parents.

Captive insurance modernization promotes:

  • Improved operations and cost savings through more efficient and appropriate use of resources by leveraging technology.
  • More accurate reserving and risk selection through new modeling capabilities that harness enhanced data analytics, often hosted in cloud applications.
  • Streamlined data collection processes that reduce administrative burden and provide “one source of the truth” for many stakeholders.
  • Transparency in processes for a robust internal control framework considering data reconciliation, financial reporting processes, and compliance with accounting and regulatory standards.
  • Strategic vs. reactive policies and improved captive program flexibility as a risk management tool.
  • Redesigned reporting approaches and tools that produce useful metrics to better communicate risk trends to leadership and business units.

Captive insurance services

Actuarial

We connect the underlying database, actuarial platform, and visualizations, enabling you to easily gain practical insights that save time, effort, and money. We work with you each step of the way:

  • Initiation – Collaborate with clients to understand business needs, risk management concerns, and overall objectives to identify opportunities for process improvement, applying leading practices, and determine most appropriate technology.
  • Data gathering – Simplify data gathering process to reduce administrative burden and more easily gain insights into claims and loss experience and more effective data auditing. Database creation results in detailed reconciliation and validation reports that serve a variety of reporting purposes.
  • Actuarial analysis – Create a reserving platform with a wide range of relevant exhibits, methods, and metrics.
  • Reporting and visualization – Create customizable dashboard with extensive drill-down capabilities. 400+ embedded digital accelerators mean users can easily customize reports; automation bots speed up data and results processing and automated workflows streamline processes.

Accounting

Assist with the development of US GAAP/statutory financial reporting processes at the captive level and a consolidated basis.

  • Advise and assist with the review of the quarterly/annual reporting prepared internally or by the captive manager.
  • Educate finance team on insurance contract accounting.
  • Review and advise on draft accounting disclosures and accounting policies for both the parent consolidated financials and the stand-alone captive.

We also can assist with the development of internal control frameworks to limit the risk of material misstatement of financial information, considering segregation of duties, assessing completeness of accounting records when working with a captive manager, and use of service providers.

Tax

Captive structures have federal, state and international tax considerations and opportunities. PwC advises clients during the feasibility phase and ongoing operations to identify structural and operational deficiencies and/or opportunities in current captive insurance arrangements from a tax perspective. Our specific services include:

  • Feasibility studies
  • Formation assistance
  • Tax structuring and opinions
  • Risk management reviews
  • Regulatory consulting

Contact us

Matt Adams

US Insurance Practice Leader, PwC US

Follow us