How can retailers determine if this is the right decision for them?
The biggest way is through the feasibility process. There is a soft insurance market right now, which means prices are depressed for the risk. Prices have been decreasing for the last five or six years, but as we’ve seen in the past, a hard market will arrive in the near future. Through the feasibility process, we look at the potential domicile (official residence) of a captive insurance company, the potential lines of business that may be written by this captive company, the amount of capital and surplus that would be required, and the local taxation and reporting requirements of the places you may consider.
Next, we look back at what has happened to you in the past. See how you used corporate capital to purchase insurance to hedge your risk. Do an as-if study: If you had a Captive Insurance Company (CIC) in place to write those risks — the ones you did keep for your own account or the ones you might have transferred to the professional insurance marketplace — see if it would have been a cost- and tax-efficient way to fund those risks in the past. Then you will have a track record. You can say ‘Here’s what our results would have been if we had a captive insurance company.’ That’s the best test to see if it would benefit your organization. Then you can project that track record into the future.
What are some pitfalls to avoid when creating a captive insurance company?
Make certain you have everybody on board in your own organization who would potentially be weighing in on the decision process. Make them part of the due diligence team. That way, once you begin the process, you don’t find someone in your own organization obstructing forward progress because they weren’t involved in the decision process. The due diligence team can involve tax, finance and legal experts within your own organization. Get everyone on board to look at the issues with a team approach.
When analyzing this, it’s helpful to choose a partner who has the depth of experience to answer your questions such as, ‘What are the best domiciles for my company’s particular needs?’ and ‘Who has expertise on the captive creation side and experience putting some of these programs together for other retailers?’
What’s the next step?
Once you go through the feasibility process, devise a plan of operations for the captive insurance company, depending on which domicile you determine to be the optimal choice. Then select staff to manage and administer the captive, including outside accountants and attorneys. In the domiciles that have enabling legislation for CICs, there has developed quite a large cottage industry of the professionals needed to manage these companies. Running a company can be done on a very cost-efficient basis. Once you’ve selected the people to help you manage the company, you obtain a license to operate in that domicile and make the necessary capital contributions required of the insurance company. Then, you may enter into a reinsurance agreement, in which your captive insurance company purchases insurance to protect itself.
Len Churnetski is regional practice leader, retail division, for Aon Risk Solutions. Reach him at (212) 441-1401 or [email protected]. Jennifer Bell is regional managing director, chief operating officer, Ohio-Indiana-Kentucky, Aon Risk Solutions Northeast Inc. Reach her at (216) 623-4110 or [email protected]. The 2010 Aon Retail Symposium is scheduled for Oct. 19-21 in Chicago. The agenda will consist of a dynamic mix of clients, insurers and Aon presenters collaborating in breakout sessions, and retailer-only self-moderated discussion forums. For more information on this topic and the 2010 Aon Retail Symposium, please contact Len Churnetski at (212) 441-1401.
