How to run a captive feasibility study
A captive feasibility study is a commissioned analysis of whether a captive would work for a specific organization: which risks it would insure, how much it would retain, what it would cost to set up and run, how it would perform under expected and adverse loss scenarios, and which structure and domicile would fit. Actuaries, captive managers or consultants carry it out, usually with legal and tax input, and it often underpins the business plan a regulator reviews. Delaware's captive application, for example, asks for an actuarial feasibility study with expected and adverse five-year projections.
What the study should decide
Agree the decision at the outset: whether to form a captive at all, for which lines, at what retention and in what structure. A study that compares the captive with keeping the current program, or with retaining risk without an insurer, is more useful than one built around a single preferred answer.
Step 1: Assemble the data
Most of a study's quality comes from its data. Prepare:
- loss runs for several years by line, with paid amounts, case reserves, claim counts, and dates of loss and report
- exposure data such as payroll, revenue, vehicles, property values or headcount by year
- current premiums, deductibles, limits and retentions, and the terms of expiring policies
- legal entities, ownership, locations and where each risk sits
- any existing self-insurance arrangements and how they are funded
Actuaries review and disclose the quality of the data they rely on under Actuarial Standard of Practice No. 23, so gaps found early save time later.
Step 2: Define candidate lines and layers
Identify which risks a captive might write — often lines with predictable losses, cover that is expensive or hard to buy, or risks already retained informally — and which layers it would keep or reinsure.
Step 3: Actuarial modeling
The actuary projects expected losses for the candidate layers, estimates the range of outcomes and tests premium, capital and reinsurance needs. In the United States, estimates of unpaid claims, including IBNR, follow Actuarial Standard of Practice No. 43. Ask for results under expected and adverse scenarios, not a single number.
Step 4: Structure and domicile comparison
Compare structures — single-parent, group or cell — and domiciles on their rules for the type of captive under consideration: capital, governance, reporting, approved service providers and taxes. Whether a fronting insurer is needed also affects cost and collateral.
Step 5: Total cost of ownership
Add up formation costs; management, audit, actuarial, legal and regulatory fees; fronting fees and collateral; premium taxes; and the cost of the capital tied up in the captive. Compare the total with the current program over the same period.
Step 6: Decide, then document
A positive study becomes the starting point for the business plan and application. A negative or marginal result is also useful: it supports keeping the current program, or revisiting the question later with better data.
Who contributes
| Workstream | Typical contributor | What they deliver |
|---|---|---|
| Actuarial | Actuarial consulting firm | Loss projections, premium and capital analysis, scenarios |
| Structure and operations | Captive manager or alternative-risk consultant | Structure options, operating costs, domicile comparison |
| Legal | Law firm with captive experience | Entity and regulatory analysis, application documents |
| Tax and accounting | Tax adviser and auditor | Tax and accounting treatment of the proposed structure |
Reviewing the report
| Check | What to look for |
|---|---|
| Assumptions | Loss trend, development, expenses and investment income stated and explained |
| Scenarios | Expected and adverse cases, with the capital each requires |
| Alternatives | A comparison with keeping the current program |
| Data limits | Gaps in the data and their effect on the conclusions disclosed |
| Costs | Every recurring fee and tax included |
| Next steps | What the business plan and application would require |
Feasibility study or Bastivo Assessment?
Bastivo's AI Assessment is an online, educational first look that shows how six approaches align with your answers. It is not a feasibility study: it does not analyze your loss data, set premiums or capital, or support a regulatory application, and Bastivo does not carry out feasibility studies. Use it, if helpful, to decide what to explore; commission a study from qualified professionals when a captive is a serious option.
Educational information only; not insurance, legal, tax, actuarial or regulatory advice.
- Captive Managers
- Single-Parent Captive