Your Hidden Strategic Tool: Making the Most of Your Captive Feasibility Study
A captive feasibility study is a critical early step in forming a captive insurance company, but its value goes far beyond initial approval. When fully leveraged, feasibility studies are not just technical assessments; they’re strategic tools that can shape how your company approaches risk, capital, and long-term insurance planning.
A well-structured feasibility study can act as a blueprint for long-term success with your captive. It can also help inform your company’s approach to risk and gain insights into its capital structure.
If you have any involvement with your company’s feasibility study, it’s time to move beyond the basics and look at the big picture.
Answering the Right Questions
When a company conducts a feasibility study, it’s usually to answer one simple question: “Can we form a captive?”
From that angle, the study is simply a matter of assessing the amount of risk involved, the potential financial savings, and whether there is enough capital to support the captive.
That’s an important question, and it should absolutely be answered before moving forward. However, there are two even more valuable questions that don’t always get asked: “Should we form a captive?” and “What form should the captive take, based on our strategic goals?”
These questions shift the focus away from the viability of founding and running a captive and treats it as a strategic decision. It also anchors the study in enterprise-level thinking. Instead of simply looking at historical loss data, the study expands to include the organization’s risk appetite, capital philosophy, and operational priorities.
To put it simply, a basic feasibility is a balance sheet – crunching numbers to make sure there are enough resources to support captive formation. An advanced feasibility study, on the other hand, is a narrative. Yes, it takes into account actuarial considerations and financial modeling, but always with an eye to the company’s overall goals and principles.
Designing a Captive Feasibility Study with Strategy in Mind
The fundamentals of a feasibility study are still essential. Even when taking a big picture view of the decision to form a captive, you will need to cover all the bases, including loss data, coverage structure, capital, and domicile selection.
But to take a more strategic approach, your study will also need to add a few more layers to the analysis.
Expanding Loss Forecasting Beyond the Trend Line
Instead of relying solely on five-year loss averages, a forward-looking study should also incorporate:
- Scenario modeling for extreme (but possible) events.
- Monte Carlo simulations to capture a distribution of outcomes.
- Benchmarking against peers and industry norms to validate assumptions.
This deeper approach will help decision-makers understand volatility and better anticipate capital needs.
Designing Multilayer Captive Coverage
The motivation behind forming a captive is often to cover a specific risk. It can be a great way to account for risk profiles that are unique to your organization, insure events that are typically excluded from standard policies, or simply tailor coverage to your organization’s needs.
But the design of your coverage should look beyond that. Rather than simply thinking about the risk your captive will insure, your study should consider the following:
- Multi-layer retention structures to manage frequency and severity of claims.
- Use of quota share or excess-of-loss reinsurance to optimize capital.
- The captive’s role in complementing or replacing commercial insurance.
Advanced Capital Modeling
Your captive’s domicile will have specified minimum capital requirements. While a basic feasibility study will ensure that these can be met, a more advanced one also evaluates:
- The amount of economic capital needed to absorb unexpected losses with a defined confidence level.
- Alignment with investment strategy and potential for surplus growth.
Including these considerations will allow you to assess opportunity costs and the efficiency of your balance sheet.
Fine-Grained Domicile Selection
Many feasibility studies will evaluate potential domiciles based on their tax and regulatory criteria. Those are key factors, but a more careful study will also consider a domicile’s:
- Speed to license and regulator engagement style.
- Innovation environment, especially for emerging risks.
- Geopolitical and currency stability.
Stakeholder Alignment and Getting Everyone on Board
Your feasibility study should be conducted with cross-functional input. This will allow you to draw insights from different departments, harness various types of expertise, and ensure that nothing important has been overlooked.
When done right, it also serves a second function: unifying departments in support of the captive formation. Allowing everyone to get a close look at the strategic rationale behind the captive is a great way to get their support.
Your feasibility study should include members from:
- Finance: Provides insight into capital efficiency, cost-benefit analysis, and tax modeling.
- Legal: Advises on governance, structure, and compliance across jurisdictions.
- Operations and Risk Management: Brings real-world claims data, controls, and implementation logistics to the table.
- This often includes an actuary to develop claims projections, which is especially critical for long-tail risks.
- Executive and Board: Weighs in on the strategic planning and long-term vision.
Your Feasibility Study Should Be a Living Document
Many organizations treat feasibility studies as static documents – a one-and-done financial exercise that outlives its usefulness once the captive has been formed.
That’s a mistake.
When used strategically, a captive feasibility study is a roadmap for the future and a guide to adapting over the long run.
Captives evolve. Business lines shift. Capital adequacy changes with market volatility. A living feasibility study can provide support through those changes by:
- Adding or dropping lines of coverage.
- Modeling the impact of changing reinsurance markets.
- Allowing periodic reassessment of domicile options.
Regularly updating and consulting the feasibility study means navigating these challenges with insight rather than gut feelings and guesswork.
Common Feasibility Study Pitfalls to Avoid
To get the most out of your feasibility study, watch out for:
- Optimistic assumptions about losses or investment income.
- Generic vendor templates not tailored to your operations.
- Downplaying of reputational or regulatory risk, especially for captives that will offer cyber, third-party, or ESG-related lines.
Remember, your feasibility study is a tool that you can use when dealing with regulators, auditors, and tax authorities. Taking a comprehensive approach and treating it seriously can save you a lot of trouble in the future.
Beyond the Technicalities
It’s tempting to treat the feasibility study as a preliminary requirement. After all, that drastically simplifies the process. But that overlooks so many of its potential benefits.
A well-designed study will help shape your captive’s future, support your organization as conditions evolve, and strengthen your overall approach to risk.
Approach your feasibility study as a strategic document instead of a technical one, and you’ll be surprised at how much you get out of it.
Key Takeaways
- A captive feasibility study is not just a formality — it’s a strategic tool that can influence your company’s entire approach to risk and capital.
- Go beyond “Can we form a captive insurance?” to ask, “Should we form one, and how should it be structured to align with our goals?”
- Incorporate advanced tools like scenario modeling, economic capital assessments, and peer benchmarking to enhance decision-making.
- Ensure cross-functional stakeholder engagement to unlock broader value and internal alignment.
- Treat your feasibility study as a living document to adapt your captive to future risks, opportunities, and market changes.
- Avoid pitfalls such as cookie-cutter templates, unrealistic assumptions, and narrow thinking about domicile or coverage.
A strong feasibility study sets the tone for a successful captive. Done thoughtfully, it doesn’t just justify formation — it drives long-term performance.
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