Captive Feasibility Study (CFS)

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A major difference between a captive insurance strategy and other insurance strategies is the capital investment. Unlike in a commercial insurance situation or a self-insured situation, a company that operates a captive must contribute capital (or at least it must tie up collateral to support a letter of credit). That is, when insurance is purchased from a commercial carrier or a company self-insures its risk, there is no requirement to put capital at risk. In the case of the former, premiums are paid to the insurer and become an expense; in the case of the latter, losses are paid as incurred—again, an expense. Any investor who puts capital at risk will want to make sure that capital is put to good use to benefit the business. Understanding how this investment will be utilized is where the CFS begins.

Clarify the objectives

Defining the risk

Measuring the risk

Structuring strategy

Domicile choice

Operating the captive