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Our Managing Director's book on 831(b) captives has excellent diagrams on the steps and processes of doing a risk assessment, designing a captive, forming a captive and operating a captive. Click here to view this supplement to the more comprehensive book on captives, Navigating Captive Insurance Companies - Storm Proof Your Risk Vessel, Everything You Should Know Before Hiring a Manager or Forming a Captive.
Here are the major steps in designing and forming a CIC:
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- Complete a feasibility study (you should have a high quality feasibility study completed - they are different from an actuary report which is often also needed).
- Feasibility studies are best done before you commit to engage a formation and management provider;
- If a captive program appears viable, select service providers (this can be done on a negotiated basis as is customary while keeping costs very reasonable, or the feasibility study can be used to get competing quotes - note some of the very best service providers are busy and may not respond to requests for quote, not to mention the level of service and expertise varies so greatly among providers that quotes are never apples-to-apples anyway;
- Determine optimum ownership structure and entities to incorporate asset protection and estate planning goals - this should be part of a high quality feasibility study but generally is left up to you and other advisers as most captive industry professionals do not truly have associated expertise to weigh in reliably in tax, wealth transfer and estate planning areas;
- If the tax implications are of material concern, consider obtaining a tax opinion from a qualified CPA or lawyer, or consider requesting a IRS Private Letter Ruling before proceeding with formation. Note this is rarely done due to the extra costs and delay involved, especially if your captive design meets with published IRS or applicable country revenue officer safe harbors;
- Conduct informal pre-application evaluations with domiciles the feasibility study suggests if this was not part of the feasibility study process. Domicile selection is mission critical to assure efficiency and flexibility of operations, avoid unexpected costs and delays, have investment and distribution discretion expected, and assure a smooth and efficient wind-up;
- Select the domicile, then begin the formal application process - assemble personal and business documentation needed to apply for a captive insurance company license (every domicile requires slightly different information). Domicile related formation fees start around $2500 and exceed $10,000 in many jurisdictions;
- Larger established captive management firms generally charge at least $25,000 for forming a small captive insurance company; and these fees are in addition to any domicile fees, the fees of other involved professionals and often even the feasibility study;
- Minimum required start up capital varies between domiciles and the availability of cell or series captive programs to participate with;
- Start up capital for small simple CICs ranges from $10,000 to $250,000 or more depending on domicile selection, type of captive, and ownership structure - this capital generally must be in a segregated account before a license application will be approved and the captive can commence doing insurance business;
- A labor intensive portion of forming a captive is assembling required documentation (such as owner/director affidavits, bios and disclosures, insured financials, policies, reinsurance agreements, conflict of interest policy, code of ethics, investment policy, corporate formation documents, organizational minutes, business plan, financial proformas, background checks, anti-money laundering affidavits, professional recommendation letters, proof of citizenship and residency, etc);
- Once the required entities are formed (the captive entity as well as the entity and/or trusts created to own the captive) and a captive insurance application submitted, substantial additional steps are required in connection with commencing captive operations if you want your captive operations and foundational documentation to meet best practice standards;
- Some of the many formation and start-up related tasks include obtaining tax ID #s, opening bank accounts, depositing initial capital, issuing purchase orders for captive lines of coverages, authorizing premium levels, invoicing covered insureds, setting up the captive accounting system, creating an operating and procedure manual, adopting business plan and budgets, making necessary tax elections, conducting associated formation meetings and organizing the entity corporate books, and many other activities needed to properly commence and document captive insurance company formation and commencement of operations.
