The Captive Decision Framework

Many organisations reach the captive conversation through a broker recommendation, a peer referral, or a general sense that they are paying too much for commercial coverage. The result is that the decision to proceed is often made before the right questions have been asked.

This lesson provides a structured framework for evaluating whether a captive is genuinely appropriate for your organisation — before structure type, domicile, or consultant selection enters the conversation.

The Five Gateway Questions

1. Do we have insurable risk?

A captive must insure genuine risk — risk that is fortuitous, measurable, and not certain to occur. This sounds obvious, but in practice, many proposed captive structures fail this test: the "risk" is too predictable, too controlled, or too small to constitute a meaningful transfer of economic uncertainty.

2. Is our premium volume sufficient?

The fixed costs of operating a licensed insurance company — actuarial, legal, audit, domicile fees, and management — typically run between $75,000 and $200,000 per year for a simple single-parent captive (based on 2024–2025 market conditions; costs vary by domicile, lines written, and service provider). At $300,000 in annual premium, those costs consume a significant portion of the economic benefit. At $2M+ in premium, the economics are considerably more compelling.

3. Is our loss experience predictable and favourable?

A captive is an appropriate vehicle when you expect your actual losses to be lower than what a commercial carrier charges in premium. If your loss experience is volatile, catastrophic, or worse than market pricing, you are generally better served by commercial insurance.

4. Can we absorb a bad year?

A captive is a balance sheet. In years where losses exceed premiums, that shortfall must be funded — by the captive's surplus, by a capital call from the parent, or by excess of loss reinsurance purchased by the captive. Organisations that cannot absorb this volatility should either purchase additional reinsurance protection or reconsider the captive altogether.

5. Do we have the governance infrastructure to operate a regulated insurer?

A captive is not a passive tax structure. It is a licensed insurance company with regulatory filing obligations, a board of directors, actuarial certification requirements, and audit obligations. The parent must be willing to commit real management attention to these responsibilities.

From Gateway Questions to Feasibility Study

The gateway questions are not a green light to form a captive; they are a filter to decide whether a formal feasibility study is warranted. A strong result means "proceed to detailed actuarial and financial modelling," not "incorporate a captive." A weak result means the opposite: pause and redesign the concept or abandon it before meaningful advisory cost is incurred. Treating a quick screening conversation as an implicit go/no-go decision is one of the most common early-stage errors.

The Decision Matrix

Criterion	Weight	How to Score
Annual premium volume	High	>$2M = Strong; $500K–$2M = Moderate; <$500K = Weak
Loss ratio vs. commercial market	High	Materially better = Strong; Similar = Weak; Worse = Stop
Loss predictability	Medium	Stable, actuarially credible history = Strong
Risk transfer genuineness	Critical	Must pass — non-negotiable
Governance capacity	Medium	Dedicated management attention available = Strong
Capital adequacy	High	Can fund worst-case year without distress = Strong

What Comes Next

If your organisation clears these gateway questions, the next step is a captive feasibility study — a formal actuarial and financial analysis that quantifies the expected economics of the proposed structure under a range of loss scenarios. A credible feasibility study is the foundation of every well-structured captive.

In Module 02, we move from the conceptual to the technical: premium setting, capital requirements, risk transfer analysis, and the accounting treatment that will govern how your captive's results appear on the consolidated financial statements.

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