Guest Perspective
Risk Financing, Part 2 of 3 regulatory compliance / claims procedures / financial reporting / shareholder statement reviews / outsource relations with risk service providers / reinsurance, fronting market etc.
Overseeing a captive is comparable to managing a football team where the goal is to build a playbook and field the best team possible to achieve success. In this analogy, the captive program administrator plays the quarterback position in conjunction with your trusted agent / broker, and their first job is to recruit a seasoned, proven captive manager. The captive manager is responsible for ensuring all technical quality controls are adhered to. The playbook for the captive manager incorporates a turnkey approach, so you( as captive customer) can focus your attention on growing your primary business.
Here’ s a five-step primer as an overview for setting up a captive:
Step 1- Determine the Likely Captive Structure: Single parent / association / risk retention group / agency / rent-a-captive / protected cell.
Step 2- Conduct a Captive Feasibility Study: A captive feasibility study is undertaken to determine whether a contemplated risk financing program is feasible for a particular organization / or group via detailed financial forecasting and extensive account operational risk assessments.
Step 3- Interview and Retain a Captive Manager: Focus on expertise in actuarial, regulatory, domiciliary, investment, tax, reputation and capacity( time to do the job right).
Step 4- Select a Captive Domicile: With 70-plus captive domiciles available worldwide, key elements for consideration of domicile( as regulator) should include political stability, access, support services and cost.
Step 5- Preparation and Submission of a Captive Application: Upon determination of a captive structure, feasibility study, choosing captive manager and selecting a domicile, your application should take 60 to 90 days to complete the process.
Captive Feasibility Study
As a crucial extension of the playbook referenced earlier, the captive feasibility study is a top priority element in alternative risk financing. Your study provides an independent assessment as a detailed blueprint for successful development. This
Sections
process involves more than just a surface-level review; it’ s a deep dive into the crane customer’ s risk profile, historical data and financial structure to ensure the most effective and efficient use of captive features in alternative risk financing decisions.
The data points required for conducting a holistic and detailed captive feasibility study include obtaining current policy details and a five-year minimum historical exposure data for each line of business with associated claim history details for each corresponding year of exposure data.
Additionally, establishing baseline metrics that include internal rate of return with tax rates at federal and state levels can be crucial considerations in your study. Captive program developers having access to organizational structure details with associated tax environments, growth potential and acquisition plans that will provide a true state of risk profile of the crane company to establish proper alternative risk financing structures that reflects both current and future realities for your captive plans.
• The captive industry has grown in influence, scope and international recognition in recent years. A formal captive feasibility study enables crane organizations to recognize the financial, operational and risk management factors occurring through the feasibility study, as compared to simply maintaining the status quo in traditional insurance with year-over-year coverage and cost challenges.
• An agile captive manager brings knowledgeable insights about captive industry changes and developments surrounding
Basic Captive Feasibility Study Elements 1. Executive text High level presentation of our findings and recommendations
2. Structure review Determination of optimum structure- cell, agency, association or direct insurance company.
3. Domicile comparison Multi-domicile comparison: regulations, infrastructure, applilcation, timelines, costs, fronting requirements and recommendation of the best domicile in which to establish the vehicle.
4. Captive manager selections Outline of core management services needed by the risk bearing entity and review of potential third-party managers.
5. Costs and timeline Breakdown of costs and specific timeline and project plan for establishing structure.
6. Fronting and reinsurance Analysis of fronting and reinsurance requirements. 7. Program design Estimated costs for reinsurance program design. 8. Premium and claims analysis An analysis of the premium and claims of the cover( s) under consideration. 9. Retention structure Determination of optimum per occurance and aggregate retentions.
10. Finacial proforms Production of detailed five-year financial business plan— cash flows, underwriting accounts, P & I, balance sheet, solvency or capital requirements.
11. Future strategy Potential future developments for the vehicle including new products or other lines of insurance to include.
federal and state laws for inclusion in your study.
• The feasibility study is used to design a risk mitigation plan of action to answer important questions surrounding your policies and coverages.
• The diagram above highlights common elements of a captive feasibility study.
Conclusion
Identifying the true total cost of risk coupled with recognizing industry capabilities to mitigate crane risk factors can be achieved through alternative risk financing methods. Focusing on continual risk awareness via the unbundled( captive) environment will measurably reduce crane risk. These two elements are key drivers of the changed mindsets that are evidenced by growth in alternative risk financing around the world.
A true risk awakening is occurring, and the transformation to an action-oriented crane risk culture will save lives and contain litigation in our crane operating workplaces. These two risk improvement dynamics will favorably impact our crane marketplace for years to come. Collectively, we can achieve continual crane risk culture improvement via common-sense, de-risking efforts, that focus on a“ hearts and minds approach in daily crane risk awareness,” as an adjunct feature of your alternative risk financing journey.
Kevin Cunningham is president and CEO of Crane Risk Services, and has 27 years of experience in crane risk management. He can be reached at Kevin @ craneriskservices. com.
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March 2025 • www. cranehotline. com