In the above illustration, the captive insurance company has the lowest cost of risk and is therefore the most efficient risk financing strategy.
Retaining risk in a captive and “on balance sheet“ enables the group to retain profitable premium that would otherwise go to a third-party insurer. However, the captive is able to capture a greater proportion of the third-party premium because it is a formalized insurance vehicle and complies with the group’s contractual and statutory obligations to have insurance. Retaining these risks on balance sheet is unlikely to be acceptable to external stakeholders, so the group must purchase additional third-party insurance coverages to meet these obligations.
The path to a captive insurance vehicle starts with a feasibility study to access the business case, including the financial, strategic, and operational benefits and limitations of alternative risk financing methodologies. If it is determined that a captive vehicle would benefit your organization, Marsh Captive Solutions, with your tax and accounting teams, can help you to determine the setup that meets the unique needs of your organization.