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CAPTIVE
SUCCESS FACTORS A captive should be a long-term vehicle for stability rather
than an emergency measure for short-term cost/coverage advantages. Success improves when members continue to
buy coverage, or creatively use the captive/RRG, during soft market
conditions. Twelve key success factors
include the following: 1. LONG-TERM COMMITMENT Members
should commit to a program for at least three to five years. The capital of departing
members should be retained for at least three years and possibly
forfeited for withdrawal within the first three to five years. 2. PRUDENT FUNDING Assets must be available to cover
the maximum probable loss faced by the captive/RRG. Capitalization may be in the form of cash,
letters of credit or other reliable tender. Reinsurance should be used to protect
the company against a large single loss or accumulation of losses. Retained risk should be within prudent
guidelines. Group programs should maintain a
high degree of confidence. We suggest
90% confidence that revenues will exceed expenses and claims. Initial capital contribution should
probably be equal to 30% of initial premium – which is reflective of a 90%
confidence level. Actuarial
reserve and loss projections should be updated annually. 3. REDUCED EXPENSES Captives/RRGs can be less susceptible
to market cycles than commercial insurers if they are able to “run lean”. Renegotiation, elimination and
reduction of service providers’ fees should be reviewed continuously and
remain a high priority for the program.
A cost-containment plan can help to reduce costs. |
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