The importance of regularly reviewing your captive insurance company
Captive insurance companies were once seen as exotic risk management tools, adopted primarily by visionary risk managers who were ahead of their time in understanding, quantifying and managing risk.
Over the past 40 years, the landscape has evolved significantly. Organisations now approach risk management with the same rigour and strategic importance as other core business decisions.
Today, most Fortune 1000 companies either own a captive insurance company or have assessed the benefits of forming one. These captives are typically established to address specific needs, such as filling gaps in insurance coverage, leveraging tax efficiencies, building reserves for unforeseen events and reducing overall risk costs.
While the feasibility study conducted during the formation of a captive outlines its expected benefits, these initial projections may not hold indefinitely. Regular reviews are essential to ensure that the captive continues to deliver value and remains aligned with the organisation’s changing goals. While most captive owners routinely assess the financial performance of their captives and broaden their coverage lines, the majority are not conducting formal, comprehensive evaluations that could reveal gaps and new opportunities.
Regular reviews matter
More important than ever; here’s why regular reviews and readjusting objectives are critical to ensure a captive’s optimal performance.
Changes in leadership and risk management
The past decade has seen significant turnover in C-suite and risk management roles, with many experienced risk managers retiring and new leaders stepping in. This transition often results in a loss of institutional knowledge about the captive’s original purpose, benefits and strategic value.
Without a structured review process, new leadership may overlook the captive’s role in risk management or fail to leverage its full potential. Regular evaluations help ensure continuity, reaffirm the captive’s strategic purpose and provide new decision-makers with a clear understanding of its financial and operational advantages.
Evolving risk profiles
Risk management has become integral to nearly every business decision, from launching new products to entering new markets and even hiring key talent. The risk landscape is constantly changing, and the assumptions underpinning a captive’s formation may no longer hold true.
For example:
• Emerging risks such as cybersecurity and ESG (Environmental, Social, and Governance) concerns were not contemplated when forming the captive and may be ideal coverages for inclusion.
• Existing risk retention strategies may need to be adapted to evolving market conditions or regulatory changes.
Regular reviews help keep the captive aligned with the organisation’s current and future risk profile.
Lack of understanding and information
Many captive owners struggle to quantify the ongoing benefits of their captive insurance company. Without clear metrics or detailed reporting, it becomes difficult to assess whether the captive is delivering the intended value. In fact, many organisations underestimate the benefits of their captive, leading to missed opportunities in effectively communicating its value to C-suite.
Focus areas
A thorough review of a captive should encompass both financial and non-financial elements, irrespective of the initial motivations for its formation. Some key areas of focus include:
Corporate goals and captive mission
From inception, the objectives and mission of the captive should be clearly defined. During a review, it's crucial to reassess these objectives to ensure the captive is achieving its intended goals. The review should also determine whether these goals remain aligned with the broader corporate strategy. Any shift in corporate direction or structure should prompt a re-evaluation and potential realignment of the captive’s objectives.
Financial performance
Regularly setting and evaluating financial targets is essential. The board of directors should establish benchmarks for underwriting performance, investment returns and risk tolerance. If targets are not met, management must provide clear explanations, allowing the board to adjust targets as necessary.
Capital levels and adequacy
Capital forms the foundation of any insurance entity, playing a critical role in its sustainability. The board must routinely assess capital levels, conducting stress tests to gauge adequacy across various scenarios – ranging from poor underwriting performance to adverse investment market conditions. Scenario modelling should, at minimum, cover potential downturns, ensuring preparedness for both likely and unlikely events.
Corporate governance
Robust corporate governance is vital, yet often under-reviewed, as boards may prioritise evaluating financial performance. Governance reviews should address several key areas:
• Domicile: Assess whether the current domicile remains suitable. Changes in domicile leadership or regulations could impact the captive’s ability to meet its objectives.
• Board composition: Evaluate whether the board possesses the necessary expertise and availability to provide effective oversight and guide the captive towards its strategic goals.
• Service providers: Review the frequency of issuing requests for proposals (RFPs) for service providers and the use of KPIs to measure performance and value.
Frequency
The frequency of reviews for a captive insurance company should strike a balance between thoroughness and practicality. Informal reviews can be conducted every one to two years, focusing on key areas such as financial performance, governance and alignment with corporate objectives. These allow for ongoing monitoring and incremental adjustments.
Formal independent reviews, however, should be carried out at least every five years. These comprehensive evaluations provide an in-depth analysis of all aspects of the captive, ensuring it remains compliant, financially sound and aligned with long-term corporate strategies.
Best practices
Independent review
Engaging third-party experts for strategy development and guidance is advisable. Independent reviews can uncover areas for improvement and provide unbiased recommendations, free from conflicts of interest that may arise with incumbent managers.
Regular review cadence
Establishing a consistent schedule for reviews allows for continuous improvement and timely adjustments.
Committee formation and objective setting
Creating a dedicated committee with clear objectives for the review process ensures accountability and focused efforts towards enhancing the captive’s performance.
Setting key performance indicators (KPIs)
Setting KPIs for a captive insurance company is crucial to its success and sustainability. These indicators also help demonstrate value to stakeholders and ensure the captive operates within its risk tolerance.
The true benefits of regular reviews outweigh the costs
Regularly reviewing your captive and quantifying the benefits is essential in ensuring organisations are optimally using their captive and that the associated costs are reasonable.
Some of the key benefits of the review include:
Enhanced C-suite communication
Presenting the benefits of the captive in financial terms aligns with C-suite expectations, fostering transparency and a clearer understanding of the captive's purpose. This approach can also facilitate easier access to additional funding when needed.
Comprehensive review of overlooked areas
While most organisations understand the overall value a captive provides, regular reviews allow for a thorough assessment of all operational aspects, which might otherwise be neglected.
Reducing slippage
Regular reviews help identify and mitigate potential losses and excess costs. Even minimal slippage can accumulate over time, leading to significant financial impact.
Agility in response to changing conditions
Frequent reviews enable captive owners to adapt strategies promptly and maintain focus, which helps the organisation remain agile in dynamic conditions.
Final thoughts
Regularly reviewing your captive insurance company isn’t just a best practice – it’s a strategic necessity. As risk landscapes shift and corporate priorities evolve, captives must adapt to remain valuable, compliant and financially sound.
A well-structured review process ensures that your captive continues to align with organisational goals, identify emerging risks and optimise financial performance. Beyond mitigating inefficiencies, these evaluations enhance C-suite communication, improve governance and strengthen overall risk management.
Ultimately, a well-managed captive is more than an asset – it’s a powerful tool for financial resilience and strategic growth. By committing to regular reviews, organisations can maximise the full potential of their captive, ensuring it remains agile, relevant and a cornerstone of long-term success.
Bill Mourelatos is SVP – captive specialty at GPW and Associates. He can be contacted at: bmourelatos@gpwa.com.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
