Turning Risk into a Calculated Asset
Why Due Diligence is Non-Negotiable
A captive insurance company is a long-term strategic vehicle, not a temporary policy adjustment. Because it involves the creation of a licensed, regulated financial entity, the due diligence phase is the most critical period in the captive’s lifecycle. At Ingram Insurance, we do not simply “sell” captives; we conduct rigorous feasibility studies to ensure that the structure is not only viable but significantly more profitable than traditional insurance alternatives.
The feasibility study serves three primary audiences:
- Your Executive Leadership: Providing the financial justification for the capital outlay.
- Regulators: Demonstrating that the captive is adequately capitalized and professionally managed.
- The IRS: Establishing a clear “business purpose” for the captive to ensure favorable tax treatment.
Phase I: The Quantitative Analysis (The “5-Year Look-Back”)
The foundation of any Ingram Insurance feasibility study is a deep dive into historical data. We perform an exhaustive “5-year look-back” of your commercial insurance history to identify the “delta”—the gap between the premiums you paid and the claims you actually incurred.
Key Data Requirements for Phase I:
- Loss Runs: Five to seven years of detailed loss history by line of coverage (Workers’ Comp, General Liability, Auto, etc.).
- Exposure Bases: Historical and projected payroll, revenue, vehicle counts, and property values.
- Current Policy Review: Identifying “leakage” where your current commercial policies may be over-pricing risk or excluding critical exposures.
Phase II: Actuarial Science and Stress Testing
Data is only useful if it is interpreted through the lens of actuarial science. Ingram Insurance partners with leading actuaries to model how your captive would perform under various scenarios.
- Loss Forecasting: We use statistical modeling to predict future “expected” losses and “adverse” (worst-case) scenarios.
- Retention Level Analysis: Determining the optimal amount of risk for your captive to keep (e.g., the first $250,000 of any claim) and where to start purchasing reinsurance.
- The “10-10” and ERD Tests: We conduct industry-standard risk transfer tests to ensure the captive qualifies as “insurance” for tax purposes, typically requiring a 10% chance of a 10% loss or a minimum 1% Expected Reinsurance Deficit (ERD).
Phase III: Strategic Domicile Selection
Where your captive is “born” dictates its regulatory environment, tax burden, and operational costs. Ingram Insurance provides an objective analysis of onshore (U.S.) versus offshore international jurisdictions.
Onshore Domiciles (e.g., Vermont, Tennessee, Delaware)
- Advantages: Proximity to headquarters, familiar legal systems, and high reputational standing with U.S. stakeholders.
- Considerations: Often have higher initial capitalization requirements and stricter investment restrictions.
Offshore Domiciles (e.g., Cayman Islands, Bermuda, Barbados)
- Advantages: Greater structural flexibility, potential lower startup costs, and deep expertise in global reinsurance.
- Considerations: May require international travel for board meetings and enhanced IRS reporting (such as Form 5471).
Phase IV: Pro-Forma Financial Modeling
We don’t just guess; we build five-year financial projections that show exactly how the captive will impact your bottom line.
Your Custom Pro-Forma includes:
- Income Statement: Projected premiums, investment income, and underwriting profit.
- Balance Sheet: Projected loss reserves and surplus accumulation over time.
- Cash Flow Analysis: Tracking how premium payments are utilized for claims versus investment growth.
Phase V: The Operational Implementation Plan
Once the feasibility is confirmed, Ingram Insurance manages the transition from a “study” to a “company.”
- Selection of Service Providers: We vet and coordinate your captive manager, actuary, auditor, and legal counsel.
- Regulatory Filing: We manage the formal application process with the selected domicile’s Department of Insurance.
- Capitalization: We guide you through the process of funding the captive (via cash or letters of credit) to meet statutory requirements.
- Policy Drafting: We create custom “manuscript” policy forms that provide the specific coverage your business needs.
Conclusion: Data-Driven Confidence
The goal of our due diligence process is simple: to ensure you never have a “bad surprise” with your captive. By the end of this process, you will know exactly how much capital is required, what your projected ROI will be, and how your business is protected against the most volatile market cycles.
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