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CAPTIVE SUCCESS FACTORS

 

A captive should be a long-term vehicle for stability rather than an emergency measure for short-term cost/coverage advantages.   Success improves when members continue to buy coverage, or creatively use the captive/RRG, during soft market conditions.  Twelve key success factors include the following:

 

1. LONG-TERM COMMITMENT

           Members should commit to a program for at least three to five years.

 

                    The capital of departing members should be retained for at least three                  years and possibly forfeited for withdrawal within the first three to five years.

 

2. PRUDENT FUNDING

Assets must be available to cover the maximum probable loss faced by the captive/RRG.  Capitalization may be in the form of cash, letters of credit or other reliable tender.

 

Reinsurance should be used to protect the company against a large single loss or accumulation of losses.  Retained risk should be within prudent guidelines.

 

Group programs should maintain a high degree of confidence.  We suggest 90% confidence that revenues will exceed expenses and claims.   Initial capital contribution should probably be equal to 30% of initial premium – which is reflective of a 90% confidence level.

 

            Actuarial reserve and loss projections should be updated annually.

 

3. REDUCED EXPENSES

Captives/RRGs can be less susceptible to market cycles than commercial insurers if they are able to “run lean”.

 

Renegotiation, elimination and reduction of service providers’ fees should be reviewed continuously and remain a high priority for the program.  A cost-containment plan can help to reduce costs.

 

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