It's a Good Time to Form a Captive

But hurry, because by the time prices in the traditional market rise again in earnest, it will be too late.

Astute buyers know that if they can't always sell during the highs, they can at least buy during the lows. So it is with captives. The time to set up your captive is when prices are relatively soft, as they are now. By the time prices shoot up, it will be too late and companies will be stuck with no choice but to shop around for higher rates in the traditional market.

Creating a captive is a long-term proposition. It's not something you do lightly, and you certainly don't approach it as you might a "flavor of the month," at the local ice cream parlor. Setting up a captive is expensive, and doing it well requires paying attention to loads of regulatory detail and hiring expensive, skilled managers.

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A well-run captive can last as long as your company is in business, and a captive offers an exceptional vehicle in which to place risks that are too difficult and expensive to cover in the traditional market. There's no doubt that a captive should be integrated into a well thought-out alternative risk strategy. Serious parent companies that take this approach are going to find that captives provide long-term -- that's the key word here -- protection at a very low total cost of risk.

Today, captives are flexible and offer all sorts of alternative risk management solutions, so even if it takes a little research and requires companies to commit resources to set up a captive, it's money well spent.

Having branched out beyond their original purpose as an insurance company formed to insure the risks of a corporation that wasn't in the insurance business, captives today are multifaceted. Segregated cell captives, for example, separate the assets and liabilities of its participants. The more recent 831(b) captive exists primarily for investment purposes.

Don't forget, if need be, a corporate parent can always put the captive in sleep mode if, after it's been set up, the sponsor's insurance needs have changed.

For the record, it's worth noting the new captives that have been set up around the country in a soft market. Vermont, the nation's leading captive domicile, registered 41 new captives in 2011. Utah registered 69 new captives. Hawaii licensed 10 new captives last year. Plenty of companies think that setting up a captive in a soft market is a good idea.

The soft market window is closing, so perhaps it's time for companies without a captive to set one up. You never know how long prices will harden for, or when the next opportunity will come around.

CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at ctuohy@lrp.com.

March 1, 2012

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