Conducting a captive feasibility study is a critical step in captive formation. It allows companies to make informed decisions about whether to form a captive and the best way to do so.
In this article, we’ll go over the basics of a feasibility study, what they include, and who is involved in creating them.
What Is a Captive?
First, let’s set the groundwork by defining captives.
At its core, a captive is an insurance company that is founded and owned by a non-insurance business (its parent company). The captive exists to provide insurance coverage to its parent company.
Captives allow companies to have more control over their policies and to manage their coverage costs more effectively.
What Is the Purpose of a Feasibility Study?
A feasibility study is conducted or commissioned by an organization that is considering forming a captive.
It is a careful analysis that is meant to determine:
- Whether the company has the resources to form and maintain a captive insurance company.
- Whether the company is likely to benefit from a captive – and how much it risks by forming one.
- Which type of captive it should form – including its structure, its domicile, and other strategic considerations.
Forming a captive is a costly endeavor that comes with potential risks. A thorough feasibility study ensures that it’s the right decision for the organization, that it has the means to establish a captive, and that the captive is structured in a way that is optimal for the parent company.
Is a Feasibility Study Required for Forming a Captive?
Strictly speaking, not always.
A firm could theoretically decide to go right ahead with the captive formation process and worry about the details later. While they’d need to come up with a decision-making process for certain steps (like selecting a domicile), they could skip the formal study entirely.
However, most respected domiciles expect a feasibility study as part of the license application process. Proceeding without one may severely limit the company’s options and could even jeopardize approval. While not always legally required, a formal feasibility study is effectively essential for gaining regulatory approval in most jurisdictions.
It’s also just prudent. Proceeding without a study might accelerate the captive formation process. But doing so without a feasibility study could end up being costly or simply a waste of time and resources.
There’s no benefit to making the wrong decision faster. It’s better to carefully evaluate the decision and its implications up front, rather than deal with potential headaches down the road.
Additionally, most domiciles will only approve a captive if its parent company has clearly done its due diligence. A feasibility study demonstrates that the company understands the risks and has thought through the strategy. Without one, companies may be limited to working with jurisdictions that are more lenient but potentially less aligned with their long-term goals.
What Are the Components of a Feasibility Study?
Not every feasibility study looks the same.
Some are very comprehensive exercises that consider the ins and outs of captive formation. They will dig deep into the company’s financials, carefully analyze its risk profile, and consider various factors to determine whether captive formation is a smart decision—and how best to approach it.
Others are more limited in scope. They may focus primarily on financial viability and avoid broader structural or operational planning. While this can be faster, such studies may not meet the expectations of regulators or serve the organization’s long-term needs.
That being said, here are some of the major elements you’re likely to see in a more thorough evaluation:
- Actuarial Forecasting: Anticipated losses that would be covered by the captive, the premiums paid for the policy (or policies), fronting fees, and other expenses. Actuarial partners typically conduct this work to help determine whether the company is prepared to absorb those risks.
- Financial Analysis: A review of the company’s financial history, along with projections based on current and anticipated earnings. This analysis determines whether the organization has the resources to form and sustain a captive.
- Comparison of Captive Structures: An evaluation of different captive structures to determine which would be most suitable for the organization’s needs. For instance, if the study finds that forming a pure captive isn’t a wise option, it may recommend joining a group captive.
- Domicile Assessment: A comparison of various domiciles to identify the most suitable options. This includes evaluating factors like regulatory environment, tax treatment, credit ratings, and speed of formation.
- Startup Requirements: Ensuring that the company is able to meet the capital requirements and compliance criteria for forming a captive.
Who Conducts the Study?
Captive feasibility studies can be done internally, outsourced to a third party, or done with a combination of company team members and outside experts.
Internal Feasibility Studies
An internal feasibility study typically involves members from various departments, including executives, legal, accounting, and—most importantly—risk management. The risk team will often take the lead in gathering input, managing analysis, and delivering recommendations to company leadership.
This approach is more common in large corporations that have both the resources and in-house expertise to evaluate the captive formation process on their own.
External Feasibility Studies
Outside experts can also carry out feasibility studies on behalf of a company. In many cases, this will be done by an insurance broker experienced in captives. However, captive managers, actuarial firms, and risk management consultants are frequently involved and bring specialized insight to the table.
Small to mid-sized organizations are more likely to rely on third parties to conduct a feasibility study, but even large corporations often use consultants to supplement internal findings and provide independent validation.
The Feasibility Study as a Living Document
Throughout this article, we’ve discussed feasibility studies as if they were one-and-done exercises. Sometimes, they are. A company will commission a feasibility study, form a captive (or decide against it), and file away the documentation.
However, a feasibility study can also be updated over time and treated as a living document. As the company’s financial position, risk exposure, or strategic goals evolve, revisiting the study can help ensure that the captive continues to align with the parent company’s needs.
Many companies treat the feasibility study as a formality—a necessary step to forming a captive. But when it’s used as a strategic asset, it can be so much more than that.
Key Takeaways
- Companies conduct feasibility studies to determine whether forming a captive is a viable and beneficial option.
- Feasibility studies can be completed internally or with the help of outside professionals.
- They are typically led by insurance brokers, captive managers, actuaries, or risk management experts.
- These studies evaluate the company’s financials, risk profile, and capital readiness.
- More thorough studies also analyze captive structures, domicile options, and long-term strategic fit.
- While a feasibility study may not be legally required, it is a best practice—and often essential for regulatory approval and strategic clarity.
Related Reads: Dive Deeper into Captive Insurance
- What is Captive Insurance, Exactly?
- What is a Fronting Agreement (And How Does it Work)?
- Three Captive Insurance Types You Should Know
- Busting 10 Common Myths About Captive Insurance Companies
- What is a Captive Feasibility Study?